December 27, 2013
Each year, auto insurance companies declare millions of vehicles to be "totaled," meaning it's not worth the cost to repair them. It doesn't matter whether the car was damaged in a collision, during a flood or after a thief's joyride went bad.
It's hard to argue with such an assessment if your car was wrapped around a telephone pole or the gas tank exploded. But what if the damage was more cosmetic, such as major dents on the roof and hood from a hailstorm?
A vehicle is considered a total loss if the insurance company determines that the total cost to repair your car to pre-accident condition, plus fees for storage, salvage and a replacement rental car (if included in your policy), is more than a certain percentage of car's retail value. Insurers set their own allowable percentage, within state-mandated guidelines (typically around 60 to 75 percent), and use their own formulas to determine a car's value and estimated repair costs.
Thus, if your $4,500-valued 2002 Honda Civic sustains $1,800 worth of damage – moderate bodywork and repainting these days – it might be deemed totaled, even though the engine still runs fine. On the other hand, a late-model Mercedes could sustain far greater damage and still be considered salvageable.
What's worse, if the accident was your fault, or you must otherwise tap your own insurance (e.g., it was caused by an uninsured driver), you would only receive that $4,500 minus your deductible. Good luck finding a comparable car for that amount.
Other big losers when a car is totaled are people still paying off their auto loan. Since the lender technically owns the car, they'll get first crack at any insurance payment; and you'll still be responsible for paying off the loan balance.
As a preventative measure, you may want to purchase gap insurance if you owe more than the car's retail value – or if you rolled past debt into the new car loan. It will pay the outstanding loan balance if your car is totaled or stolen. Most insurers will let you add gap insurance at any time.
Here are a few additional points you should know about when and why a car is declared totaled, and precautions you can take ahead of time to lessen the impact:
Let's hope your car is never totaled, but it pays to know in advance what to do if it is.
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