Actual Total Loss: Definition, Valuation, Vs. Constructive

What Is Actual Total Loss?

Actual total loss is a loss that occurs when an insured property is destroyed or damaged to such an extent that it can be neither recovered nor repaired for further use. Often, an actual total loss triggers the maximum settlement possible according to the terms of the insurance policy. 

Actual total loss is also known as "total loss." Sometimes, people will refer to a piece of property that cannot be salvaged as "totaled."

Understanding Actual Total Loss

Occasionally, property covered by insurance can become destroyed or damaged to such an extent that it can no longer be used or reasonably salvaged. Whether it was caused by theft, natural disaster, an accident of some sort, or something else, the insured party should qualify to receive a payout from the insurance company for the insured value of the property. The insurance provider determines the amount covered in a process known as ground-up loss.

Actual total loss can be contrasted with constructive total loss, which occurs when a property is technically only partly damaged but increasing damage seems unavoidable, or the property has still been rendered unusable and beyond fixing. In such cases, the cost for the repair of an item—a house, boat, or car—is deemed to be more than the current value of that item. As a result, the insurance company may also provide a payout for the insured value of the property.

Example of Actual Total Loss

Suppose there’s a hurricane heading for the coast of North Carolina. Hurricane Widget is a Category 5 storm and has been causing storm surges up to 15 feet high as it travels up the coast. Unsurprisingly, it wipes out numerous houses, including one owned by Bob and Sharon. All that remains of Bob and Sharon’s home is stilts on the beach, meaning the property qualifies as an actual total loss.

Nearby, three miles inland, Kevin and Julie are also impacted by Hurricane Widget. Their house flooded up to the attic and a tree came through the roof. Although the house is still mostly there, this would be considered a constructive total loss because the structure has been rendered unusable due to damage.

Limitations of Actual Total Loss

Bob and Sharon, and other victims of natural disasters, usually qualify to receive the full value of the insured property that was completely destroyed. However, there can be complications, and a maximum settlement is never guaranteed. 

Insurance companies lose money when paying out the total insurable value (TIV) and, as a result, won’t do so until they are completely satisfied that all terms have been met. Adjusters have the right to ask for proof of loss and will usually get the insured parties to compile a list of every item destroyed. Proving that the house was obliterated is relatively simple. Accounting for all the contents contained within it less so, particularly if receipts and all other evidence were destroyed by the hurricane.

Settlement amounts also hinge on the type of coverage protecting the destroyed property. In the case of an actual total loss, many people assume they will automatically receive the full amount outlined on the policy declarations page. What they fail to realize is that the key points summarized in the opening page refer to the maximum amount that can be paid.

A closer look at the document should reveal more details about the type of policy. Within the small print, the insurer might agree to cover the cost of replacing the item or fork out what is known as the “actual cash value” (ACV).

Actual Total Loss Methods

Actual Cash Value (ACV)

Actual cash value (ACV) is the depreciated value of the property at the time of the loss. In other words, it means the sum to be paid out reflects the amount that could be fetched for the item if it were to be sold secondhand or as-is.

In the case of an automobile, the ACV will consider its mileage, and everyday wear and tear to determine its worth. This inevitably means that the insured will receive less than what they paid when purchasing the vehicle, potentially making it difficult for them to go out and buy a similar model.

Replacement Cost

As its name implies, replacement cost provides the insured with the necessary money to replace the item that was destroyed. Such payments can take a while to arrive and will generally be distributed only after the insured party has already purchased a replacement.

Total Loss FAQs

What Is Total Loss Car Insurance?

Total loss car insurance is a type of car insurance that gives you the right to coverage to help pay for a new vehicle if the cost to repair your vehicle is more than its actual cash value (ACV). Your car insurance company will consider the incident a total loss if the cost to repair your vehicle is more than its actual cash value (ACV). In this scenario, your car may be referred to as "totaled."

Total loss car insurance typically has collision and comprehensive coverages. If your car becomes totaled, your car insurance company will give you a settlement, which you can use to purchase a new car. If you have collision and comprehensive coverages, your insurance company will typically pay you the actual cash value of your car if it's totaled.

How Do You Get a New Car After a Total Loss?

If the cost to repair your car is more money than what the car is worth, it will typically be considered a “total loss" by your car insurance company. If you have the right kind of insurance coverage, your insurance company will pay you the actual cash value of your car. There are two main types of car insurance coverage: collision insurance and comprehensive insurance. Collision protects your car in the event of a collision, while comprehensive covers acts of nature, such as hailstorms and falling trees.

There are several steps you must take to get a new car after a total loss:

1. File a claim with your insurance company.
2. An insurance adjuster will come from your insurance company to look at the damaged vehicle.
3. If the adjuster determines that your car is totaled, the insurance company will calculate the actual cash value of your car—the amount it would have been worth had it not been damaged. If you have collision or comprehensive coverage, your insurance company will give you a check for this amount. (This is called the settlement.)
4. If you still owe money on the car, the amount that you are entitled to will be sent to your lender first. If there is any money left over after you've paid off your car loan, your lender will send you a check. (If you don’t owe any money, you can use the remainder toward your new car purchase.)

How Do You Negotiate With Car Insurance Adjusters About a Total Loss?

Negotiating the best settlement for a totaled car is important because it can help you obtain the best deal on a totaled vehicle. Here are some steps you can take to negotiate the best loss settlement:

• If a claims adjuster decides that your car is totaled, you should be prepared to provide them with the sticker details that accompanied your car when you purchased it. (It should include a list of your vehicle’s features.)
• Before the claims adjuster gives you their offer, you should have already prepared a counter-offer. You can do this by entering all of the information you have about your car on a website like nadaguides.com. The website will help you determine the value of your car (specifically, the retail value). When you make your counteroffer, you should be able to present a printed copy. of the estimated retail amount and the features used to determine the amount.
• You can also visit used car websites, such as autotrader.com and cargurus.com, to find cars that are for sale with similar features and mileage as your car.

How Do You Get More In Your Total Loss Vehicle Settlement?

The reality is that insurance companies lose money when they are forced to pay out a settlement. It is in their best interest to pay you the smallest amount reasonably possible for your damages. However, it is possible to negotiate your car's value with your insurance company after an accident.

Here are some steps you can take to get more from your vehicle settlement:

1. Determine what you are selling to your car insurance company—do the necessary research to determine your car's retail value.
2. Prepare your counteroffer.
3. Determine the comparables in the area—you can use websites like autotrader.com and cargurus.com.
4. Obtain a written settlement offer from the car insurance company.
5. Make your counteroffer for your totaled car.

How Do You Dispute a Total Loss Vehicle Amount?

The first step you should take if you are unhappy with your auto insurance company's payout is to appeal the total loss. Most insurance companies have a process for appeals. Next, you should talk to the adjuster; most insurance companies will have you meet with one of their adjusters. You should have appraisals of your car prepared for this meeting. You might also consider hiring an independent adjuster.

Finally, if you are still not satisfied with the outcome, your last resort might be arbitration or hiring a lawyer.