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
23-01-2023

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.

Disclaimer

Insurance is the subject matter of solicitation. Bajaj Finance Limited (‘BFL’) is a registered corporate agent of third party insurance products of Bajaj Allianz Life Insurance Company Limited, HDFC Life Insurance Company Limited, Future Generali Life Insurance Company Limited, Bajaj Allianz General Insurance Company Limited, SBI General Insurance Company Limited, ACKO General Insurance Limited, Niva Bupa Health Insurance Company Limited , Aditya Birla Health Insurance Company Limited and ManipalCigna Health Insurance Company Limited under the IRDAI composite CA registration number CA0101. Please note that, BFL does not underwrite the risk or act as an insurer. Your purchase of an insurance product is purely on a voluntary basis after your exercise of an independent due diligence on the suitability, viability of any insurance product. Any decision to purchase insurance product is solely at your own risk and responsibility and BFL shall not be liable for any loss or damage that any person may suffer, whether directly or indirectly. Please refer insurer's website for Policy Wordings. For more details on risk factors, terms and conditions and exclusions please read the product sales brochure carefully before concluding a sale. Tax benefits applicable if any, will be as per the prevailing tax laws. Tax laws are subject to change. Visitors are hereby informed that their information submitted on the website may be shared with insurers. BFL is also a distributor of other third-party products from Assistance Services providers such as CPP Assistance Services Pvt Ltd, etc. All product information such as premium, benefits, exclusions, sum insured, value added services, etc. are authentic and solely based on the information received from the respective insurance company or the respective value-added service provider or Assistance company.

Note – While we have made all efforts and taken utmost care in gathering precise information about the products, features, benefits, etc. However, BFL cannot be held liable for any direct or indirect damage/loss. We request our customers to conduct their research about these products and refer to the respective product’s sales brochures before concluding their sale.