How Does an Insurance Company Determine If a Car Is Totaled?

Although you've probably heard the term "totaled" in the context of a serious car accident, you may not be clear on its exact meaning. You're not alone in this regard. Despite its grave connotations and seemingly objective definition, the term produces heated disagreements in the world of auto insurance. These disagreements can erupt between auto insurance policyholders and their carriers. They may also break out between rival insurance companies or even between employees of the same insurance company. These disputes usually hinge on the means by which the monetary value of a given vehicle's damage is calculated. If such disagreements persist, the resolution of the post-accident claims process can be delayed for months.

In general, a car is deemed to be totaled when the value of the damage that it has sustained exceeds its resale value. Since cars' values can vary by several orders of magnitude, there's no generally-accepted lower limit on the value of "total" damage. In order to be deemed a "total loss," a car that's worth $2,000 on the open market would need to sustain far less damage than a car that's worth $20,000. Expensive vehicles must be mangled beyond recognition before receiving this designation.

The value of a given car can be calculated in one of three ways: "private-party" resale value, "dealer" resale value and wholesale value.

Private-party resale value describes a car's fair value in a private-party transaction. Since these transactions tend to involve substantial markups, most cars' private-party resale values are higher than their dealer resale values. This difference can vary by as little as $100 or as much as $10,000.

Dealer resale value describes a car's average selling price on a licensed car lot. Since dealer sales often involve incentives and rebates, they tend to generate smaller returns than private-party sales. Dealers generally make up for this deficit by selling cars at higher volumes.

Wholesale value indicates the price that a dealer must pay to obtain a car from a manufacturer or distributor. Although the wholesale value of used cars tends to fluctuate by a wide margin, cars that are sold on the wholesale market fetch far less than cars that are sold on the open market. As such, car insurance companies generally use wholesale values to calculate total losses. Depending upon the overall value of the car in question, this trick can trim as much as $5,000 from a post-accident settlement.

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