It's Totaled? Here's The Bad News!

By Author: Marcus Stalder
Total Articles: 491
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One of the more common myths of our time is that the standard insurance policy is a shield against losses. It forgets two key facts. The first is the way insurers calculate the amount of the loss. In the case of a vehicle or the contents of our homes, this is not the retail price for replacing what has been damaged. It's more usually the current market value. The reason is simple. Under normal circumstances, we cannot be better off as a result of a claim. Take the average piece of furniture in our homes. It has been standing there for months, if not years. It has been used, and there will be signs of wear and tear. If the insurer was to replace the old with new, we would benefit. Thus, whenever we buy something new, it almost immediately starts to depreciate. The first element lost is any sales tax. Within weeks, the net value is also failing. Even if you total a vehicle only a month old, you will only receive the value accepted by the motor trade for a secondhand vehicle, i.e. the cost of replacing like-for-like.

Should you challenge the insurer to prove this value, you are likely to receive copies of ads for used cars ...
... of the same make, model and age. Unless you have been careful to warn the insurer you were installing nonstandard accessories, you will only be offered the assumed value of a standard model. The insurer is likely to have an in-house database of current prices for your state. As a rough guide of what to expect, you can use http://www.nadaguides.com/ which gives you three values for the make and model of your vehicle depending on the mileage. These are the trade-in value depending on whether the vehicle's condition is rough, average or clean. You will also be given the probable retail guideline for the car restored to a clean condition.

The second is the decision most of us make to accept a deductible. This is the amount we pay out of our own pockets in the event of a claim. As premiums have been rising during the recession, more people have increased the deductible rather than pay more in premiums. This means the amount you will receive should you total your vehicle will be the secondhand replacement value less the deductible. And now comes the bad news. If you took out a car loan or the vehicle is a rental, you could well be looking at a liability to pay more than the insurance policy pays out. It's not only mortgages that can be underwater. You can find yourself owing quite a large sum of money, particularly if you bought new. The only way of protecting yourself is to buy gap coverage as part of the auto insurance package. This covers the difference between what the vehicle is worth secondhand and the amount you owe. So if you expect to be upside down on your vehicle if it's totaled soon after you buy or rent, i.e. it depreciates fast or you rolled over other costs into the loan, it makes sense to get auto insurance quotes including gap coverage. Then you can see whether it's worth the risk.