How do insurance companies calculate the total loss value of a car?

How do insurance companies calculate the total loss value of a car?

Know how insurance providers determine the total loss value of a vehicle and offer coverage.

2 mins

When you purchase an insurance policy, understanding some of the terminologies or jargon associated with insurance can be difficult. However, in order to choose which policy to buy or while filing a claim, it is important to know and understand these terms properly. Let’s look at the concept of total loss in a car insurance policy and understand how it is calculated by your insurer.

What is ‘total loss’ in car insurance?

A total loss of a vehicle occurs when the repairing cost to restore it to its pre-damaged condition is more than what the vehicle’s worth. Total loss can occur in two scenarios – in case of car theft or an accident due to which the car is damaged beyond usage.

How is the total loss value calculated?

When a policyholder makes an insurance claim to the insurance provider against a damaged vehicle, the company assesses the condition of the vehicle. Based on this assessment, they decide whether the car should be repaired or declared a complete loss.

When the cost involved in repairing a vehicle to its former state exceeds the present value of a vehicle, the insurer declares it as a ‘total loss’. In such a scenario, the company determines the ‘Actual Cash Value’ of the vehicle.

Evaluation of the total loss value of a vehicle depends on several factors, such as state rules, company policies, the manufacturer and make of the vehicle.

Here are the ways by which insurance companies determine the total loss value of a car:

  • An insurance company appoints an ‘adjuster’ who inspects the condition of a damaged vehicle. This adjuster assesses the mechanical and physical condition of a vehicle. Based on this, the adjuster determines whether it can be repaired or not.

  • Following this inspection, the adjuster evaluates the ‘Actual Cash Value’ of a vehicle after considering factors, such as depreciation and the car’s demand in the area.

  • This determined value of the vehicle is taken as the market value of the vehicle in its pre-damaged condition.

  • Following are the factors on which the actual cash value of a vehicle depends:

  • Manufacturing year

  • Mileage

  • Make and model

  • Demand and supply in the area

  • Physical wear and tear

Car insurance claim settlement in case of total loss

In case of a total loss, the insurance provider reimburses the present insured declared value of the vehicle subtracted by the compulsory deductible amount. The car owner will need to move the vehicle to the premise suggested by the insurer and then transfer the vehicle ownership to the insurer. At times, the insurance company might also ask the vehicle owner to cancel the vehicle registration from the RTO.

On the other hand, during a constructive total loss scenario, the policyholder will get the entire present insured declared value of the car in the form of reimbursement from the insurer.

Calculation of insured declared value in case of total loss

The insured declared value of a vehicle is calculated by subtracting the depreciation cost of a vehicle from its manufacturer's listed price. One should note that the costs associated with registration, insurance, etc., are not taken into consideration while evaluating the IDV.

An individual can use the following formula to calculate the IDV in case of a total loss situation:

IDV= (Manufacturer’s listed price - depreciation value) + (cost of car accessories-depreciation value) of all the components of the car.

However, in order to avoid mathematical errors, one can use an IDV calculator to determine this value online.


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