A car may be totaled following an accident if repairing the damage does not make economic sense. In such cases, the insurance company prefers to buy the vehicle from you and pay you the market value of the car. Insurers use a variety of methods to determine the vehicle's fair market value. Like any estimate, these values can be inaccurate, in which case you have legal avenues for disputing the results.
A vehicle is totaled by an insurance company if the firm decides that it makes more sense to buy the vehicle from you at fair market value instead of trying to get it repaired. When the repair estimate exceeds the estimated market value of the vehicle, the insurance company often must total the vehicle, as per state insurance regulations. However, even when the estimated repair costs do not exceed the vehicle's worth, but are fairly close, the insurance company may chose to total the vehicle.
Once the decision has been made to total the vehicle, you will be asked to sign the title of the car over to the insurance firm. The insurer will usually sell these cars at an auction, and where the car ends up next is up to the buyer. Some vehicles end up in the scrap yard, while others are "chopped up" so their parts can be used in other vehicles. If economically feasible, the buyer may fix the damage and sell the car with a salvage title. This avenue cannot be pursued if the appraiser has declared the vehicle to be impossible to repair and put back on the road safely.
The amount of money you will receive from the insurance firm will depend on the estimated fair market value of your vehicle before the accident. Insurance companies rely on the prices of similar used cars on dealer lots, computerized data and expert opinion to arrive at a final estimate of fair market value. An insurer may use just one of these methods or a combination of them, weighted to arrive at an average. Unfortunately, the precise formulations and methodologies, such as where the insurers collect used car price data and what input the computerized models use, are often proprietary. While they will share with you the estimated fair market value they arrived at, you may not be told how the insurer calculated at this figure.
The amount you will be paid after your car is totaled equals the fair market value minus your deductible. So, if the total market value of the vehicle was calculated as $9,000 and you had a $750 deductible, you will receive a check for $8,250.
If you are found to be negligent and therefore partly or wholly responsible for the accident and your insurance contract contains a contributory negligence clause, the insurance company may deduct an additional amount from this figure.
If you believe that the fair market value presented by the insurance company is too low, collect evidence proving that your car was worth more and contact the insurer directly. Such evidence can be classified ads, quotes from the authorized dealer for certified pre-owned vehicles similar to yours and estimates from reputable online sources. The insurer would prefer to work with you and satisfy you if possible, as opposed to a court battle. If you cannot reach an agreement with the insurance firm, you will need to contact an attorney who will help you take the case to arbitration or litigation.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.