It's best to learn how a total loss insurance claim works before a total loss. Many individuals find out too late that their policy is inadequate for their needs. A little pre-planning can prevent a policyholder from having to reach into her pocket to makeup the difference between the insurance claim check and the cost to replace an improperly insured item.
Before an insurance company can pay for a total loss they must determine how they will come up with the value of the property or vehicle. The insurance company refers to the valuation clause for this determination.
The valuation clause describes how the property is valued in the event of a loss. The two most commonly used valuation clause definitions are actual cash value (ACV) and replacement cost.
A policy with an actual cash value valuation clause determines the amount of a total loss by calculating the amount it costs to repair or replace the item at the time of the loss and then subtracts the applicable depreciation. Therefore, when the insured receives the check for the total loss, they will be unable to replace the item unless they pay the depreciation expense out of pocket.
Replacement cost valuation on the other hand, pays the policyholder the amount it costs to repair or replace the item with one of similar kind or quality. The insured is made whole and will not have to reach into her pocket for the depreciation differential.
Total Loss and Deductible
Whether the policy has a replacement cost or actual cash value valuation, in the event of a total loss, the policy deductible applies. Therefore, if a person totaled a brand new car insured by an insurance policy on a replacement cost valuation, although the insurance company will pay for the full value of the car, they must deduct the amount indicated in the deductible portion of the policy. Thus, a policyholder insuring a car valued at $30,000 with a $1,000 deductible on a replacement cost valuation, would receive a check in the amount of $29,000 in the event of a total loss.
Title and Ownership
When an insurance company and policyholder agree upon a total loss, the title, or ownership of the damaged property is signed over to the insurance company. In essence, using the above example, the insurance company paid $29,000 to own the rights to the damaged vehicle.
It's important to ensure the correct payee information on an insurance policy. In the event of a total loss, the check is made out to the policyholder and the company or individual listed on the Loss Payee or Lien Holder endorsement. Therefore, if the outstanding loan for the insured vehicle is completely paid off, remove the lien holder from the policy immediately.