How Do Car Insurance Companies Calculate Total Loss Value?

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In 2019, Illinois residents were involved in 312,988 automobile accidents. Of those accidents, 89,133 resulted in injuries, and 1,010 accidents were fatal. That’s equal to over 10 people injured every hour due to a vehicle accident.

With these serious accidents comes the hassle of dealing with insurance companies who are financially incentivized to pay you less than the fair value of your vehicle. This process is called “total loss valuation” and it’s important to know how insurance companies calculate this number before you accept their offer. This article discusses how automobile insurance companies calculate vehicle losses in Illinois and what you can do to make sure you are paid your fair share in the event you end up with a totaled car.


How is the value of a totaled car determined?

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In Illinois, a vehicle is deemed a “total loss” when the repair costs plus scrap value exceeds the fair market value of the vehicle prior to the crash. For example, let’s say your vehicle had a fair market value of $14,000 and you were in an automobile accident. If your vehicle’s salvage value was $6,000 and the repairs cost $10,000, then your vehicle is “totaled” since the salvage value and costs of repair exceed its fair market value ($16,000 scrap and repair versus $14,000 fair market value). When your insurance company declares that your vehicle is a total loss, the insurance company pays you its full market value as is required, minus any deductibles for the totaled car.


What is fair market value?

NAIC Definition

The National Association of Insurance Commissioners (NAIC) defines fair value (or fair market value) as the amount at which an asset could be bought or sold in a current transaction between willing parties. NAIC further explains that quoted market prices in active markets are the best evidence of fair value and shall be used as the basis for the measurement.

Definition in Plain English

In plain English, this definition is saying that the market value is what a typical buyer would pay for your vehicle in its current condition on the open market. This value is different than the Kelley Blue Book value or the NADA value, which are both used by insurance companies to lowball customers. The car’s fair market value accounts for things like special features, customization, and sentimental value that may not be captured in an appraisal guide.

This is different from a car’s actual cash value (ACV), which represents the replacement cost minus depreciation of a damaged car at the time of the loss.


How much must insurance companies pay out for a totaled car?

When an insurance company determine the vehicle a total loss, it is required to pay out the vehicle’s “fair market value” from prior to the accident. This is rarely the value of the vehicle at the time it was purchased, as depreciation, miles driven, wear and tear are factored in and deducted from the vehicle’s value. If your totaled car has low miles, was well-maintained, and has no rusting, it will be worth more when calculating fair market value.

Other Factors that May Impact Fair Market Value

Other factors that may impact a vehicle’s fair market value prior to an accident include:

  • The geographic location in which the vehicle is being sold
  • The time of year
  • The make, model, and trim level of the vehicle
  • The age and mileage of the vehicle
  • Whether the vehicle has been in any prior accidents
  • The presence or absence of any damage not related to the accident
  • The types of parts used by a body shop for previous repairs not related to the accident
  • The availability of similar vehicles
  • The desirability of the vehicle
  • The method used to sell the vehicle (e.g., dealer sales, private party sales, auction sales)


What is the cutoff value for repair?

Under the Illinois total loss formula, the cutoff value of repair is the fair market value of the vehicle prior to the accident minus its scrap value. If the actual cost of repair exceeds this value, then the vehicle is considered a total loss, and an insurance company is not required to repair your vehicle.


Can the insurance company install used aftermarket parts to repair my vehicle?

A repair shop will typically use three types of parts to perform repairs. Naturally, high quality, original parts are the most expensive, and insurance companies avoid paying for these parts whenever possible.

Types of Parts Used in Vehicle Repair

  1. Original equipment manufacturer (OEM) parts. These parts come straight from the company that manufactured the vehicle. As a “brand name,” they are typically the best quality and the most expensive.
  2. Non-original equipment manufacturer (non-OEM) parts. These parts are “generic” and are not always made of the same higher-quality materials as OEM parts. As a result, they tend to be substantially cheaper.
  3. Used or salvaged parts. These parts are obtained from a junk yard, salvage yard, or salvaging companies. Oftentimes they are refurbished or recycled from other wrecked vehicles. While they are OEM parts, they are used and are typically the least expensive repair option.

You can request that your insurance company use OEM parts to repair your vehicle. However, if the costs of using OEM parts are unreasonable, insurance companies are allowed to use non-OEM parts so long they are of like kind and quality as OEM parts. In fact, insurance companies almost exclusively use generic non-OEM parts in order to keep costs down, although under Illinois law they are required to disclose this practice whenever it is employed.


Can you negotiate total loss value?

Insurance companies have an incentive not to pay you the fair market value of your vehicle. If you believe your insurance company’s offer is not the fair market value, you have the right to object and negotiate for a higher payout. A trusted mechanic or Kelley Blue Book can be good resources. Photographs of your vehicle in its original condition as well as documentation of good upkeep and can also be helpful. If your vehicle had special features, contact your dealer as they may have written verification of your vehicle’s specifications.

If your efforts are unsuccessful, your may have to file a lawsuit or arbitrate your claims. However, this process can be expensive and should only be done as a last case scenario.


Factors that Affect Fair Market Value of Your Car

  • Odometer. The more miles driven, the more wear and tear on a vehicle. Engine parts will be more worn out, and the coverall value of a vehicle will decrease as its mileage increases
  • Vehicle Year. Unless vehicle is a collectible, older makes and models tend to depreciate over time as new models and technology reaches the market.
  • Overall Condition. Vehicles with no scratches, dents, tears, or fading will command a higher fair market value. Rust and broken electronics will also depreciate the value of a vehicle.
  • Aftermarket Modifications. Expensive aftermarket modifications such as custom paint work, rear spoilers, and loud sound systems can actually hurt your vehicle’s resale value as the average subjective buyer might not be interested in these features.
  • Color. Unusual colors such as brown and orange can also impact the value of your vehicle.


Who pays the taxes and transfer fees for my new vehicle?

If you purchase a replacement vehicle or new car, keep your purchase documentation handy because insurance companies must also pay all applicable sales tax, licensing fees, and transfer fees if you purchase a new vehicle. These charges quickly add up in Illinois, so do not forget to include them when filing a claim!


What if I owe more than my totaled vehicle is worth?

Unfortunately, if the fair market value of your vehicle is less than your car loan balance, you will be responsible for the difference. If you have gap insurance in addition to your standard comprehensive or collision coverage, it will cover your shortfall, less any deductible.

If you were in a car accident where the other driver was at fault, you may be also entitled to compensation from that driver’s insurance company to cover any shortfall between your car loan balance and the car’s value. In this scenario, you should avoid providing any written or recorded statements as they will use those statements against you in an attempt to avoid paying what you are rightfully owed.


How do I know if I am being offered a fair settlement?

To determine if you are offered a fair settlement from your car insurance company, you can calculate your car’s actual cash value and fair market value. Additionally, the best way to ensure you are being offered a fair settlement for your totaled car is to have your vehicle appraised by a qualified professional. Many insurance companies have their own in-house appraisers who work for the company and not for you. As a result, these appraisers may be biased and lowball you on the value of your vehicle.

It is important to get a second opinion from an independent professional appraiser. An independent appraiser will not have any financial stake in the outcome of the appraisal and will therefore be more objective when assessing your totaled car value.


What if I disagree with the insurance company’s settlement offer?

If you disagree with the insurance company’s settlement offer for your insurance claim, you have a few options.

First, you can try to negotiate with the insurance company. If you have documentation to support your position, such as a professional appraisal, you may be able to get the insurance company to increase its settlement offer.

How to File a Complaint

If negotiation is unsuccessful, you can file a complaint with the Illinois Department of Insurance. Another option is to file a lawsuit against the insurance company. This should be a last resort, as lawsuits can be time-consuming and expensive. If you do decide to sue, you will need to hire an attorney.


Do you have any tips on getting a fair settlement from an insurance company?

Get a Second Professional Opinion

If you are in an auto accident and your vehicle is totaled, be sure to get a professional appraisal of your vehicle’s value prior to accepting any settlement offer from the insurance company. An independent appraiser will not have any financial stake in the outcome of the appraisal and will therefore be more objective.

You can find an independent appraiser in your area by searching online or contacting your local Better Business Bureau.

Keep Excellent Records

In addition, it is important to keep good records of all communication with your insurance company, including any conversations you have with any claims adjuster or other representatives. It may also be helpful to take notes after each conversation, including the date, time, and name of the person you spoke with. This documentation will be important if you need to file a claim with your state’s insurance department or file a lawsuit against the insurance company.


What if I was injured in my automobile accident?

If your car was totaled in an accident, there is a good chance that you were injured as well. It is important to seek medical treatment right away and to avoid speaking with your insurance company until you have had a chance to consult with an experienced personal injury attorney. Many people mistakenly believe that their health insurance will cover all their accident-related medical expenses, but this is not always the case. Often, you auto insurance policy will contain Medical Payment coverage or Personal Injury Protection (PIP) coverage that will pay for some, if not all, of your accident-related medical expenses.

In addition to medical expenses, you may also be entitled to compensation for lost wages, pain and suffering, and other damages. An experienced personal injury attorney will know how to get the maximum possible compensation for your injuries. Contact The Kryder Law Group, Accident & Injury Lawyers today for a free consultation to find out how much your case might be worth.

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