Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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Written by Jeffrey Johnson
Insurance Lawyer Jeffrey Johnson

Laura Walker graduated college with a BS in Criminal Justice with a minor in Political Science. She married her husband and began working in the family insurance business in 2005. She became a licensed agent and wrote P&C business focusing on personal lines insurance. Laura serviced existing business and wrote new business. She now uses her insurance background to help educate drivers about...

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Reviewed by Laura Walker
Licensed Agent for 10 Years Laura Walker

UPDATED: Apr 25, 2022

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When a driver has a car accident, his insurance company must assess the damage and determine how they want to settle a claim. Being that they want to spend as little money as possible, they will go with the cheapest option available.

If the car in question would be cheaper to replace than repair, you have a scenario known as a total loss accident.

The easiest way to remember the definition of a total loss accident is to simply assume your insurance company has decided to pay to have your car replaced. Of course, this is all contingent upon the fact that you carry collision and comprehensive insurance.

If all you have is a standard liability insurance policy, then the idea of a total loss accident is moot.

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How does an insurance company determine total loss?

There are a number of factors that go into determining whether or not your car should be declared a total loss after an accident. The Massachusetts Office of Consumer Affairs and Business Regulation does a great job of explaining how most insurance companies go about it.

As a general rule, insurance companies will write a check equal to the value of your car on the open market. They use different resources to place a value on the vehicle, including things like the National Auto Dealers Association guide and the Kelley Blue Book.

These resources take into account normal wear and tear, mileage, and so on.

The state of Massachusetts correctly points out that your insurance company is not likely to pay you an amount of money equal to what it would cost you to replace your vehicle if modifications to it have added extra value.

For example, if you spent thousands of dollars to add custom wheels and tires to your car, don’t expect your insurance company to pay for that.

Where wheels and tires are concerned, they will only consider the value of stock items normally found on similar cars.

How do insurance companies decide which option is cheaper?

Once an insurance company knows the value of the vehicle with which it is dealing, adjusters must then determine whether it’s cheaper to repair the car or replace it. Again, they use a variety of sources to make this determination.

One of them is an industry survey of local body shops to determine average labor rates.

According to Body Shop Business, a website dedicated to collision repair pros, labor rates for collision work are all over the board.

They cite some cases in New York where $50–$55 per hour is normal; they also cite some examples in California where the cost could be twice as much.

According to the website, insurance companies are legally required to provide detailed information about their labor price surveys upon request.

Body Shop Business says that courts have routinely determined labor rates in most markets will be within a range of prices deemed “reasonable” by most shops. In some cases, courts have found that an insurance company setting an arbitrary rate at the lowest end of a local range is not necessarily fair to customers.

But there is nothing definitive that standardizes labor rates nationwide.

Can I challenge the appraisal offered by my insurance company?

Most states give drivers the legal right to challenge their insurance company’s appraisal of a damaged vehicle. In states like Oregon, for example, your insurance company must provide you with documentation to support their appraisal.

If you disagree with the value they’ve assigned to your car, you can appeal that decision.

How you go about filing an appeal is different from one state to the next. Oregon recommends that you do your own research into the street value of your car, documenting everything carefully, then send a completed report to your insurance company along with a request for review.

State laws require insurance companies to treat their customers fairly and honestly every transaction. Therefore, it’s likely your request for a review will be honored accordingly. If, after review, you still think your car insurance company isn’t appraising your vehicle properly, you can always file a complaint with your state insurance department.

There’s also the option of filing a civil lawsuit as well.

If my car is declared a total loss will the insurance company take it?

When a car insurance company declares a vehicle a total loss they may choose to take the car and dispose of it themselves, or allow the owner to keep and dispose of it. Dallas-based law firm Rochelle McCollugh, LLP explains that your insurance company is actually purchasing the car from you when they send you a check.

As the new owners of the vehicle, they have a legal right to determine how it is disposed of.

If it’s worth their while, they may pay to have the car towed away so it can be sold to a salvage yard or at a public auction.

If they don’t think they can make enough money to cover their costs, they may allow you to keep it. In such a case, you would have the option to sell it to a junkyard, dismantle it and sell the parts, or just have it towed away as scrap.

Make sure you can live with the insurance company’s appraisal before you accept and cash a check.

Any check they send you becomes a legal proof that you’ve accepted their appraisal once you’ve cashed it. Even if you disagree with their offer, you have no recourse once the check clears your bank.

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How do I protect myself against an unfair appraisal?

The appraisal process is one that is entirely subjective. In all likelihood, you won’t be satisfied with any appraisal unless it enables you to replace your vehicle with one you deem to be of equal value. Since that rarely happens, most of us involved in a total loss accident will end up with less money than we had hoped.

There’s no way to protect yourself against lower-than-expected appraisals without purchasing a car insurance policy that guarantees to pay you replacement value. These types of insurance policies are more expensive than a standard policy, but potentially worth it if you invest a lot of money in modifying your car.

With this type of policy, you and your insurance company agree on an appraised value at the time the policy is initiated. Should you be involved in a total loss accident, you would get a check for that agreed amount, no questions asked.

Every time you want to increase the policy’s value due to modifications you’ve made, a new appraisal will have to be conducted.

Will I get enough money to pay off my car loan after a total loss accident?

For a lot of drivers, the thing to fear most in a total loss accident is owing more money on your loan than your car insurance company is willing to pay you. Some industry experts borrow a term from the housing industry to describe this type of situation.

They call it being “upside down” on your loan. Almost every driver is in this position without even knowing it.

As an example, let’s say you buy a brand-new Kia Soul for $18,000. Even with a $2,000 payment, the actual amount of your loan will still be in the $18,000 range after you add taxes, title fees, delivery charges, etc.

As soon as you drive the car off the lot, it automatically loses 10 percent to 12 percent of its value because all of those extra charges are no longer part of the equation.

Taking things one step further, consider the fact that most new cars lose between 15 percent and 20 percent of their value within the first year of ownership. That number jumps to 25 percent after three to five years.

If you have a total loss accident in the first year, your Kia Soul may only be worth $14,500 while you still have a loan balance of $16,000.

You can avoid this upside down condition by purchasing something known as gap insurance. This type of policy makes up the difference between what you owe on your loan and what your car is worth. It’s fairly inexpensive and you only need to carry it for a few years.

Once your upside down situation is reversed you can drop it.

Can I have my car replaced if I only have liability insurance?

If you only have liability insurance your provider is not obligated to pay to replace or repair your vehicle. You’ll either have to pay that yourself or, if you live in a fault-based state, consider suing the other driver if he caused the accident.

Other than those two options, you’re pretty much out of luck.

Unless you have enough disposable cash to repair or replace your car yourself, it’s generally a good idea to have comprehensive and collision insurance.

Even with that, however, you will still probably end up spending at least a little money if you’re involved in a total loss accident. That makes it all the more important to shop around for the best insurance deal.

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