When the cost of repairs exceeds a car’s actual value or it is unsafe to drive, insurance companies declare it a total loss. The car is sold for salvage and the insurance company pays the actual cash value (ACV) to the owner or lien holder. Policyholders can negotiate the ACV, but lienholders are paid first. The insurance company is protecting its economic interest and will use the ACV minus reasonable salvage costs as a cap on repair costs. The policyholder negotiates the ACV, and once agreed upon, the insurance company pays it minus the deductible. Liens are paid first, and if the ACV is insufficient, the policyholder is responsible for paying the balance. The car is sold to a salvage yard for working parts, and anything unsold is crushed up and sold for scrap.
An automobile is declared a total loss by the insurance company when the cost of repairs after an accident or other covered event exceeds the car’s actual value (ACV), or when it would be unsafe to drive even after repairs have been completed. Full, or total loss, vehicles are sold for salvage and the insurance company pays the car’s ACV to the owner, lien holder, or some combination of the two. Policyholders whose cars are totaled can negotiate with the insurance company for the ACV, but are second in line behind lienholders for payment. While commonly understood as a characterization of a car’s roadworthiness, declaring a total loss of a car is actually more of an economic statement than a mechanical diagnosis.
When an insurance company exercises its right to declare a car totaled, it is simply protecting its economic interest. From the insurance company’s point of view, paying more to fix a car than it’s worth is unjustified on economic grounds. In fact, in some cases, insurance companies will use the car’s ACV less than reasonable salvage costs as a cap on repair costs. For example, if the car’s ACV is $8,500 US Dollars (USD) and the reasonable salvage value is $400 USD, the car will be declared a total loss if the estimated repair costs exceed $8,100 USD.
After declaring a total loss on a car, the insurance company will assess the ACV and make an offer to the policyholder, who can either accept it or negotiate a different value. Policyholders are generally advised to negotiate the ACV on a totaled car, because as a general rule, insurance companies will make a conservative initial offer. If the policyholder can demonstrate that the ACV is higher, based on actual sales in the area and the price ranges of the guide, he should be able to make a substantially better second offer.
Once the insurance company and the policyholder come to an agreement on the ACV, the insurance company pays for it, minus the policyholder’s deductible. Liens listed on the car title are paid first, to the extent of the outstanding debt. All remaining money is paid to the insured. If the ACV is insufficient to meet the claimant’s claim – the total outstanding debt that is secured by the car – then the policyholder is responsible for paying the balance. The insurance company will notify the appropriate state automotive department, triggering the creation of a new title document called a salvage title, which will alert prospective buyers that the car has been declared a total loss.
The car itself is typically sold to a salvage yard, who will try to recoup its cost by selling the working parts of the total cars. Most total cars have some serviceable engine parts, such as the engines themselves, alternators, and transmissions. Also, if the tires are in decent condition, they will be taken off and sold to a used tire dealer. Items such as radios and global positioning systems (GPS) are also removed and put up for sale, and intact body parts such as bumpers, fenders and windshields may also be removed and sold. If all of the repairable parts removed from the total car are sold, the salvage yard will receive significantly more than the salvage fee it paid for the car; anything that isn’t sold is crushed up and sold for scrap.
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