Shuman Roy is an entrepreneur, business owner, and musician. He started RoysNoys, LLC in 2013 as a music production and education service company. He also offers small business consulting and advisory services to help businesses get from start-up mode to turn-key operations. Shuman earned his M.B.A from the Stern School of Business in 2001 and has an undergraduate degree from Manhattan College in ...

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Content Writer & Entrepreneur Shuman Roy

Joel Ohman is the CEO of a private equity-backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Joel...

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Reviewed by Joel Ohman
Founder, CFP® Joel Ohman

UPDATED: Jun 28, 2022

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Insurance Q&A: “Why do insurance companies total cars?”

When it comes down to it, the insurance industry is a “for-profit” outfit. They charge you for collision and comprehensive coverage based on the value of your vehicle. You then pay for the amount of liability insurance you want. State minimums are relatively low, but some policies go up to $1 million in property damage and bodily injury. Either way, insurance companies will only pay out to the limits you paid for.

When your insurance policy activates after an accident, it’s not meant to make you richer. It’s only meant to restore you to where you were. This is why if you have an older car that would only sell for $3,000, it may not be worth it to pay for collision coverage. When the repair costs exceed the value of the car, the more cost effective option for them is to just pay you for the car and total it out.

Insurers, like almost every other business in the world, are out to make a buck. As a result, sometimes they “total a car” when it may very well be repairable.

Are some totaled cars more obvious than others?

All of us remember Driver’s Education in high school. You probably saw a video, visited the local police station, or had a battered vehicle towed to your campus on a flatbed truck to demonstrate the disastrous consequences of drunk driving.

The car was totaled…no questions asked. The twisted hunk of metal was probably almost unrecognizable as a car. This is a clear example of a totaled car.

There was no amount of money available that would make the car drivable again. Even if someone did buy it, it would probably be for scrap metal as it wouldn’t be worth it to invest the money to make it drivable.

When a car is damaged beyond repair, it is considered a total loss, or “totaled”. Sometimes it’s not so easy to tell, however. The complex systems in today’s cars can mean even a less serious looking accident may still mean a total loss if an expensive part of the car is damaged.

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How much coverage do insurance companies actually offer?

Insurance companies cover your car for its actual cash value in the event it is damaged. This isn’t necessarily how much it’s worth to you personally. If you’ve installed a lot of after market parts, this value may not even include the parts. If you feel the value they’ve assigned is too low, you can argue your case using market valuators. But there’s no guarantee they’ll raise the payout value.

This is an important part of understanding the logic behind “functionally totaling” a vehicle.

Once you consider a vehicle’s actual cash value at the time of loss, the reason your car was totaled becomes clearly evident.

If the cost to repair your vehicle exceeds its actual cash value, it’s totaled…repairable or not. Generally, auto insurance companies do this based on estimates. If the estimated loss claim goes beyond a certain ratio of the value, they assume unseen damage will fill in the rest.

The insurance company is not going to pay MORE money to fix your car than what their contractual liability to “total” it would be (contractual liability is the ACV).

This is true even if it leaves you without a vehicle or enough money to buy a new a ride.

Let’s look at an example:

Your car’s actual cash value is $3,500 at the time of loss (when the accident occurred).

If the cost to repair your car is $3,501, the insurer is going to “total” the car and give you $3,500 MINUS your auto insurance deductible.

The insurer is only on the hook for $2,500 if your deductible is $1,000 (expressed as $3,500 minus $1,000).

[How does insurance determine the value of a car?]

Let us guess; you’re furious because $2,500 is not enough money to replace your vehicle.

Recognizing the insurer will make a few bucks on the back-end by selling the “totaled” vehicle off as scrap metal and for parts may add insult to injury.

It might not sound like a lot of money, but they may sell thousands of cars each year, which really adds up.

Sorry for bringing that up…but you came to a site called The Truth About Insurance, so we had to tell you.

Are you unsatisfied with your insurance company?

It may be time to switch insurance companies even if solely out of spite (kidding). This happens all the time. Sometimes, people are just looking for a better insurance premium. Other times, people switch because they didn’t like the insurance adjuster valuation method or other parts of the service they received.

Get insurance quotes online or visit a local independent insurance agent to shop your rate.

A good agent may have advised you to not purchase full coverage auto insurance on a vehicle that has a good chance of being functionally totaled.

But keep in mind that if you opt for liability only coverage, your car won’t be covered for physical damage in the event of an insurance claim.