If a car is severely damaged in an accident, the insurance company may declare it a total loss. The company would sell the car for scrap and send the owner a check to buy another vehicle.
Reasoning
Insurance companies total a car if the cost of repair is too high compared to its value. This is a simple business decision; the insurance company does whatever is cheaper for them.
Repair Cost
The insurer adds to the repair estimate any other amounts it is responsible for, such as the cost of a rental car. Some companies also add in compensation for the diminished future resale value of the repaired car.
Replacement Value
The replacement value of a car is the average value for that type of vehicle adjusted for its mileage and options. The insurer may subtract for any known damage prior to the accident.
Net Salvage Value
The salvage value is the estimated amount received from the salvage company minus any costs to sell or transport it.
Decision Criterion
The total repair cost is compared to the difference between the replacement value and the net salvage value. The insurance company will total the car if the repair cost is greater. Some insurers elect to scrap cars if the cost is more than 50 percent of this difference.
