Your vehicle is totaled. You call your insurance agent and quickly realize the settlement that is still to be determined likely will dictate your options and replacement vehicle.

Listed below are insights into how an insurance company decides if a vehicle will be repaired or written off as a total loss, how the value of a vehicle is determined, and your responsibilities if you owe money on a totaled vehicle.

Got a loan or lease? Insurance required

Let’s start with the basics: Comprehensive insurance coverage and collision insurance coverage help pay to replace a totaled vehicle. These two separate, optional policies are typically required by a leasing company and the financial institution holding the vehicle loan. If the loan is paid off, these policies are optional for the vehicle owner. However, both polices offer peace-of-mind in the event the vehicle is totaled.  

Each state has a formula to determine under what circumstances a car must be totaled by an insurance company. Go online, determine your state’s insurance regulations. In addition, each company has its own formula for determining a totaled vehicle.

In some states if the damage is 50 percent or more of the vehicle’s value prior to the accident, the state requires that the vehicle must be totaled. Other states put the percentage at 75 percent, a few 100 percent. Most states combine the cost of the repairs and the vehicle’s scrap value. If the repairs and scrap value equal or exceeds the pre-accident value, the car is totaled.

Where comprehensive coverage figures in

A vehicle totaled due to a fire, flood, falling trees and light poles, hitting a deer and several other scenarios is covered by comprehensive insurance. However, if the vehicle is totaled and optional comprehensive or collision coverage is not on the vehicle, the owner may have to pay out-of-pocket to purchase a replacement vehicle. It depends on the accident scenario.

The formula to determine the value of the totaled vehicle is no different than determining the value of any used vehicle. The insurance adjustor records the vehicle’s mileage, the condition of the interior, exterior and tires, and value of added accessories. Next the adjustor will look for comparable vehicles in that geographic area to determine wholesale values and resale prices. That data will be used to determine the vehicle’s value prior to the accident, flood, fire, etc. Then a settlement will be offered.

Do homework before taking a settlement

However, before accepting a settlement do your homework. Check internet websites to determine the value of your vehicle. Unless you do that research, you have no idea whether the insurance company’s offer is fair or terrible. If you are unhappy with the offer, explain to the adjustor why, show receipts for recent repairs, new tires, etc. The company may come back with a second offer. Your insurance company may allow hiring an appraiser for a second opinion. However, that cost will come out of your wallet.

If there is a car loan when totaled, you are responsible for paying off that loan. The insurance company will issue a check payable to you and your lender; both of you need to sign it. Typically, the financial institution is paid first. The remaining amount of the settlement if any is given to the person who has insurance on that vehicle. However, if the loan exceeds the company’s payout, you are responsible for paying off the remaining balance on the loan or meeting the lease’s requirements. Depending on the vehicle’s value, the size of the loan and the terms, that could be thousands of dollars coming out of your pocket.

Minding the GAP

However, there is a remedy to avoid that issue, Guaranteed Auto Protection insurance, commonly called GAP. The optional insurance covers the difference between the money received from the settlement and the amount still owed on the vehicle loan or to meet lease terms. Most lease contracts include GAP insurance, however.

For example, say the vehicle is totaled and the insurance company provides a $13,000 settlement. However, you owe $17,000 on the loan. GAP would provide $4,000 covering the difference between the company’s settlement and the remaining loan balance. GAP can be purchased when the new or used vehicle is bought at a dealership or it can be added at a later period. Many insurance companies offer GAP coverage.

Salvaging the situation

Is it wise to keep the totaled car, take the settlement and do your own repairs?

An insurance company sends a totaled vehicle to an auction where savage yards bid on the vehicle; it keeps the proceeds. However, if you want to keep the vehicle and repair it, assuming it is allowed in your state, the company will take bids from salvage bidders to set the market value and deduct this amount from your settlement. A few words of caution: The title will be labeled as “salvaged vehicle” and after the vehicle is repaired it will be difficult if not impossible to get insurance or resell it at a good price.

Finally, let’s say the vehicle was totaled one or two months after it was purchased new. Will the insurance company provide a new replacement? The good news is that in most cases a new vehicle likely will be in your driveway.

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