When Is A Vehicle Considered Totaled?

When and whether a vehicle involved in a collision is considered “totaled” for first-party insurance purposes is an issue of great angst and confusion for most consumers. We hear horror stories of older but functioning vehicles being “totaled” simply due to a bent frame or other seemingly minor or even hidden damage. Even insurance professionals can get turned around navigating the maze of rules and regulations surrounding the act of “totaling” a vehicle under a policy. It needn’t be all that complicated. This article will hopefully help take the guesswork out of when a vehicle is to be deemed a “totaled” or a “total loss” and the resulting responsibilities and ramifications applicable to a salvage title vehicle.

First-Party Total Loss Insurance Claims

We must first be clear on a matter of great importance: when and whether a vehicle involved in a collision is considered “totaled” for first-party insurance claim purposes and when and whether a vehicle is considered “salvage” such that it requires a salvage title brand by a state’s motor vehicle agency. These distinctions are two very different but related concepts and practices within the insurance industry. However, “total” or “total loss” and “salvage” are often conflated, causing a great deal of angst and confusion for auto owners, consumers, and even many insurance professionals.

In insurance parlance, the phrase “total loss” in a first-party claim setting simply means that the cost of repairing a vehicle including projected supplements, projected diminished resale value, and projected rental costs, exceed the Actual Cash Value (ACV) of the pre-accident vehicle less the projected proceeds of selling the damaged vehicle for salvage. This is known as an “Economic Total Loss.” If the vehicle is demolished and is beyond repair, it is known as a “Constructive Total Loss.”

An insurance “total loss” is a function of the insurance policy and insurance company’s internal practices regarding when to pay a total loss rather than repairing a damaged vehicle. This arises after a vehicle has been in an accident and its owner files an insurance claim. Practices and standards differ among insurance companies regarding when they consider a vehicle to be “totaled” for purposes of a first-party insurance collision claim. A “salvage title” (a/k/a “branded title”), on the other hand, is issued by states when a vehicle is severely damaged, and the insurance company has determined that the cost to repair it is more than the value of the vehicle itself.

To determine the ACV of a vehicle, it is compared to similar vehicles being sold in the area, private databases such as Kelley Blue Book are referenced, or an appraiser is used. Additionally, the insurance company may add sales tax, title, and registration fees. Insurance companies occasionally have their own formulas for determining when a vehicle is deemed a “total loss” or “totaled”. Some determine the vehicle is “totaled” when the repairs are found to be at or above 51% of the vehicle’s value, while others use a figure as high as 80%. Much depends on the language of the insurance policy involved. For example, typical language found in an auto insurance policy under Part D – Coverage For Damage To Your Auto, might read as follows:

Our limit of liability for loss will be the lesser of the: (1) Actual cash value of the stolen or damaged property; (2) Amount necessary to repair or replace the property with other of like kind and quality; or (3) Amount stated in the Declarations of this policy.

Another example of policy language regarding total losses is as follows:

We will pay the cost to physically repair the auto or any of its parts up to the actual cash value of the auto or any of its parts at the time of the collision. The most we will pay will be either the actual cash value of the auto or the cost to physically repair the auto, whichever is less. We will, at our option, repair the auto, repair or replace any of its parts, or declare the auto a total loss. If, the repair of a damaged part will impair the operational safety of the auto, we will replace the part.

Therefore, the policy language of a typical policy will usually allow the insurer to consider a vehicle to be a “total loss” if:

1. The damage to the vehicle is so severe that it can’t be repaired safely; or
2. The repairs will exceed the value of the vehicle itself, or
3. The amount of damage is so severe state regulations require the vehicle be declared a total loss.

The insurance company will then pay their insured the ACV of the vehicle, plus applicable state fees and taxes, if provided for in the policy language, less any deductible owed. (Note: A chart entitled “Recovery of Sales Tax After Vehicle Total Loss In All 50 States” can be found HERE.) The policy language dictates what is owed.

If the vehicle is owned free and clear, the payment is made to the insured. If the vehicle is leased, the leasing company is usually paid. If the vehicle is financed and the lender is listed on the policy or on the title, the financing company is usually paid first. If the settlement exceeds the balance of the loan, the insured receives the balance. If the settlement is less than what is owed, the insured will be responsible for paying the rest of the loan balance.

Typically, cars are “totaled” when the cost to repair the vehicle is higher than the ACV of the vehicle. However, it is not always practical to repair a vehicle, even if the cost of repair is less than its ACV. A vehicle worth $4,000 requiring $3,000 in repairs might be considered “totaled” by an insurer even though the cost of repair is less than its value before the accident. Insurance companies will typically consider such a vehicle to be a total loss, even though the repairs are only 75% of ACV or pre-damage value, or if the vehicle is stolen and not recovered. The damage threshold varies from company to company.

While the procedure varies from state to state, once a vehicle is totaled the insurance company will typically take ownership of the damaged vehicle (thereafter known as “salvage”) and may obtain a “salvage title” for the vehicle. After it pays it’s insured the pre-loss ACV of the vehicle and forwards the certificate of ownership, the license plates and a required fee to the Department of Motor Vehicles (DMV), the DMV then issues a Salvage Certificate for the vehicle. In some cases, the vehicle is repaired, re-registered with the DMV, and classified as a “revived salvage” or “salvaged” vehicle. Of course, if the insured wants to keep the “totaled” vehicle, the insurance company will deduct the value of the salvage from the claim payment.

The criteria for deciding when a car is a total loss and when it can be repaired vary by insurance company or might even be dictated and controlled by state statute or regulation. Further complicating the issue is the fact that insurance companies do not all use the same sources for determining the value of a vehicle. The threshold used by your insurance company to make this determination can be discovered by calling your insurance agent. Insurance professionals are required to be familiar with these rules, criteria, and thresholds in all 50 states.

Total Loss Thresholds, Vehicle Title Branding, and Resale of Salvage Vehicles

The issue of “total loss” of a vehicle discussed above goes hand-in-hand with a state’s salvage/vehicle title branding laws and the two concepts are often conflated. A first-party insurance total loss does not automatically trigger salvage title obligations. Every state has its own title branding laws and requirements and some of them leave the decision of totaling a vehicle up to the insurance company. When a vehicle is declared a total loss, the insurance company usually takes ownership of the vehicle. The title is transferred into the insurance company’s name, and it then sells the vehicle to a salvage dealer, who in turn sells it to a parts yards or a recycler.

On occasion, the insured may want to keep the salvage vehicle for sentimental or financial reasons. In that case, the insurance company pays their insured the ACV less the deductible and salvage value of the vehicle. Some states have salvage laws which prevent an insured from keeping a total loss vehicle. If the insured keeps the salvage vehicle, it should not be removed from the insurance policy until a rental vehicle is no longer being used and the vehicle is no longer registered in the insured’s name. Many “totaled” vehicles are repaired and sold to the public after they are “totaled.” Insurance companies are required to declare a car totaled and apply for a salvage title once damage reaches a certain point under a state’s law. Salvage laws help the public know what is being paid for when purchasing a salvaged vehicle.

While the definition of a “salvage vehicle” differs from state to state, generally speaking a salvage vehicle is one that has been in an accident and/or sustained damages costly enough that it was declared a total loss as a result of damage at some point in the vehicle’s history. It could also be as simple as a vehicle which was stolen and not recovered in a specified time period. Often, it’s not clear who has to declare the vehicle a total loss (the insurance company or the state, as in Minnesota, which has a “total loss” definition). Therefore, what qualifies as a salvage vehicle varies from state to state, but often overlaps with a “total loss” label from either the state or an insurer.

Depending on the type and extent of damage, salvage buyers will occasionally repair these vehicles then attempt to sell them as a running vehicle. When insurance companies write off a vehicle as a “total loss”, the law in most states requires the vehicle’s title of ownership to be given a “brand.” That brand permanently marks the car as damaged goods to all potential future owners. Even so, there are ways for unscrupulous dealers to make the brand disappear. In the old days, it was literally done with chemicals. Today, photo-editing software and digital scanners are used to print new titles. There are no national titling laws. Cars can also simply be re-registered in different states until the brand falls away. According to the vehicle history provider CarFax, 800,000 cars in the U.S. — including at least 500 taxis — have been “title washed” to conceal their troubled histories.

Whether or not a vehicle is required to have a “salvage title” issued varies from state to state. In a small number of states, a salvage title is required if a vehicle is stolen and not recovered within 21 days. Arizona, Florida, Georgia, Illinois, Maryland, Minnesota, New Jersey, New Mexico, New York, Oklahoma, and Oregon use salvage titles to identify stolen vehicles. Not all total loss vehicles result in a DMV-reported branded title, however. For example, there will be no branded title if an insurance company’s definition of “total loss” is different from that of the DMV’s threshold requirement for a branded title, or when the vehicle owner is a self-insured company, such as a fleet or a rental car company. Salvage vehicles that are repaired replace the “salvage title” with a “rebuilt salvage” brand so that a buyer knows that the vehicle has been purchased as salvage, repaired, passed an inspection, and has been deemed as safe to drive.

The detailed laws and regulations regarding whether a vehicle is considered a total loss and what sort of branding or titling requirements follow, are in place in order to avoid fraud which often occurs when total loss vehicles do not get classified as salvage by insurers and other sellers or are not appropriately branded, and are not properly and swiftly reported into the appropriate state and federal databases by those entities, such as auto auctions that are handling the vehicles prior to their being offered for resale. Unscrupulous buyers of salvage vehicles often take advantage of an undocumented damage status to then offer these cars for resale to an unsuspecting public, including instances of title-skipping, where the seller – which in many cases is a major insurance company or salvage auction company, but also can include Internet focused “junk-my-car” solicitation companies, tow-to-acquire companies, charity organizations, and other companies that buy used and salvage vehicles from the public for resale – engages in a practice of title skipping to hide its part in the chain of ownership of the total loss vehicle.

In some states, such as Florida, if the vehicle is damaged to 80% of its pre-accident ACV, it is considered salvage vehicle. In other states, such as Minnesota, the vehicle becomes a salvage vehicle when the insurance company declares it to be a “total loss” and the vehicle is worth at least $5,000 and is less than six-years-old. This means that in some states, a vehicle worth less than $5,000 or older than six years cannot be deemed salvage, making those who buy vehicles which fit this description open to fraud and unsafe vehicles. In most states, vehicles which carry a salvage title may not be registered and driven on public roads. In order to resell the vehicle and operate it on the public roadways, the title must be “rebranded” with a “rebuilt salvage” brand.

The National Motor Vehicle Title Information System (NMVTIS) is a system that allows the titling agency to instantly and reliably verify the information on the paper title with the electronic data from the state that issued the title. NMVTIS is designed to protect consumers from fraud and unsafe vehicles and to keep stolen vehicles from being resold. Insurance carriers are required to provide NMVTIS with information on every salvage vehicle obtained, including total loss vehicles. The Department of Justice recognizes that many state laws have differing requirements and definitions of terms such as “salvage.” The NMVTIS requirements do not alter these state laws and the state laws do not prevail over federal definitions and requirements. However, as stated in the NMVTIS regulations, a determination of total loss under a state law will trigger the requirement for an insurance company to report a total loss vehicle. The information reported to NMVTIS is not required to be used by any future state that titles a vehicle included in an insurance carrier report.

Total Loss Threshold (TLT)

In determining whether a vehicle is subject to a state’s salvage title laws, insurance companies will calculate the Total Loss Ratio (cost of repairs/actual cash value) and then compare the resulting ratio/percentage to limits set and/or established by state law. The Total Loss Ratio is also sometimes referred to simply as the damage ratio. Some states have pre-determined percentages which dictate by law how high this damage ratio needs to be in order to be able to declare a vehicle a “total loss” and be eligible for a salvage title or certificate. This is referred to as the Total Loss Threshold (TLT). In order to total a vehicle, the damage ratio must exceed the state’s established TLT percentage. States frequently dictate this TLT as part of legislating salvage titles and it varies from state to state. A car with damage totaling 75% of its value is totaled in New York, but considered repairable in Texas, where the threshold is 100%. As an example, in Wisconsin, § 342.065(1)(c) reads as follows:

(c) If the interest of an owner in a vehicle that is titled in this state is not transferred upon payment of an insurance claim that, including any deductible amounts, exceeds 70% of the fair market value of the vehicle, any insurer of the vehicle shall, within 30 days of payment of the insurance claim, notify the department in writing of the claim payment and that the vehicle meets the statutory definition of a salvage vehicle, in the manner and form prescribed by the department.

In addition, Wis. Stat. § 340.01(55g) provides the definition of a salvage vehicle: “Salvage vehicle” means a vehicle less than seven-years-old that is not precluded from subsequent registration and titling and that is damaged by collision or other occurrence to the extent that the estimate or actual cost, whichever is greater, of repairing the vehicle exceeds 70% of its fair market value.” Many states have exceptions to these rules for older vehicles which tend to complicate the issue.

When state law does not dictate a TLT, an insurance company must determine internally when a vehicle becomes a total loss. This means that the insurance company applies a Total Loss Formula (TLF), which is usually set forth in the policy and sometimes governed by state law. It should also be noted that in some TLT states, rental costs are also considered in determining whether a vehicle is a constructive total loss.

Total Loss Formula (TLF)

When a TLT is not dictated by the state, an insurance company might apply its own internal TLT or percentage, or simply default to something known as the Total Loss Formula (TLF). However, this internal TLF cannot be less than the TLT determined by state law. This TLF can be summarized or expressed as follows: Cost of Repair + Salvage Value > Actual Cash Value. If the sum of the first two quantities is greater than the ACV, the car can be declared a total loss. As an example, a damaged 2002 Toyota Echo with 185,000 miles in good condition has an ACV of approximately $2,800. Total repair costs are estimated at $2,000, for a damage ratio of 72%. This car would be considered a total loss in Arkansas, where the TLT is 70%, but not in Florida where the TLT is 80%. In Illinois, the TLF would be used and, if the salvage were worth $700, the car would not be totaled ($2,000 + $700 < $2,800). Of course, states utilizing the TLF rely on and defer to the judgment and opinions of licensed appraisers. In determining ACV, insurers often use data unavailable to the consumer. This information is often obtained through subscription to a private database of car values – the largest provider being CCC Information Services, used by the top 50 insurers across the country.

States frequently dictate this TLT as part of legislating salvage titles. As an example, in Wisconsin, § 342.065(1)(c) reads as follows:

(c) If the interest of an owner in a vehicle that is titled in this state is not transferred upon payment of an insurance claim that, including any deductible amounts, exceeds 70% of the fair market value of the vehicle, any insurer of the vehicle shall, within 30 days of payment of the insurance claim, notify the department in writing of the claim payment and that the vehicle meets the statutory definition of a salvage vehicle, in the manner and form prescribed by the department.

Many states have exceptions to these rules for older vehicles which tend to complicate the issue. Understanding the procedure behind declaring a vehicle a total loss isn’t always a prerequisite for successful subrogation. But there are occasions when the third-party tortfeasor and its liability carrier or attorney will question the amount of damages you are looking to subrogate. In such instances, a working knowledge of this area of insurance becomes indispensable. For more detail on this complicated issue, including references to the state statutes or regulations which govern it in all 50 states, see our detailed chart entitled Automobile Total Loss Thresholds In All 50 States found HERE.

If you have any questions regarding this article or auto subrogation in general, please contact Gary Wickert (Wisconsin office) at gwickert@mwl-law.com or Lee Wickert (Texas office) at leewickert@mwl-law.com.