Understanding totaled cars

Generally speaking, a car is considered totaled when significant damage makes safe repairs impossible or the cost to repair the car comes close to or exceeds the value of the car. Depending on your insurance coverage, your auto insurer may reimburse you for the current market value of your car.

Real world example: After an accident, a claims adjuster investigates the driver’s insurance claim and determines the claim should be covered and the vehicle costs $11,000 to repair. However, in fair condition, the car is only worth $10,000. In this scenario, the insurer would likely consider the car a total loss (totaled) because it doesn’t make financial sense to pay more for repairs than the car’s pre-accident value.

How states define totaled cars differently

Some states have laws that define a totaled vehicle by specific thresholds. In Alabama, for instance, a car may be totaled when the damage is greater than 75% of its value. In that case, if a vehicle is worth $5,000 and the repair estimate is $4,000, the vehicle would likely be considered totaled. Other states may have different percentages, and in some instances, insurers may set their own thresholds.

Comprehensive coverage and collision coverage can help pay to replace a totaled vehicle. These two separate coverages are typically required on your car insurance policy if you're leasing or financing your vehicle. If your car is paid off, they're optional. But, if your vehicle is totaled and you don't have comprehensive or collision coverage, you may have to pay out of pocket to buy a replacement car.

If you're involved in a car accident and think your vehicle may be totaled, here are the steps of how the process generally plays out if you’re covered.

• File an insurance claim
• Your insurer will determine whether the vehicle is a total loss, based on repair costs and safety considerations.
• If your claim is accepted, your insurer will issue payment for the actual cash value (ACV) minus your deductible on your comprehensive or collision coverage.

Your vehicle’s ACV is how much it’s worth factoring in depreciation. To determine your car's ACV, insurers consider several factors, such as the vehicle’s age, condition, mileage, resale value, and selling price of similar vehicles in your area.

If your vehicle is financed or leased, you’re still responsible for paying off the loan, says U.S. News. Your claim payout will likely need to go toward covering those costs first, if the payment is not sent directly to the lender listed on the car title.

You may still owe your lender more for the car than the insurance payment you receive. In that case, you’re responsible for paying the remaining balance on the car lease or loan.

For instance, suppose you owe $15,000 on your car loan, but your vehicle's value has depreciated to $13,000 when it's totaled. If you have collision coverage, your insurer may reimburse you for the actual cash value of your car — in this case, $13,000. You would be responsible for the remaining $2,000 out of your own pocket.

Adding loan or lease gap coverage to your car insurance policy is one way to help protect against paying a lender out of pocket for a totaled vehicle. In fact, some lenders require it. This covers the difference between what you owe on your vehicle and its ACV at the time it becomes totaled.

If your car is totaled and the other driver’s at fault, their property damage liability insurance may reimburse you for your vehicle’s ACV. Sometimes it takes a while to determine fault, and your insurer may pay for your damaged car in the meantime – if you have collision coverage.

In some cases, a totaled car may not be anyone's fault. Suppose, for instance, that a tree topples onto your parked car and your insurer declares it's totaled. If you have comprehensive coverage on your car insurance policy, it will likely reimburse you for the actual cash value of your vehicle (again, minus your deductible).