The way insurance companies view car damage is quite a bit different from how the rest of us view it. Anyone who’s car has been totaled by an insurance company due to what appears to be minor damage is familiar with this idea. Though minimal damage may be completely repairable, an insurance company could still declare the car a total loss.

When a car is said to be ‘totaled’, it means the insurance company adjuster who inspected the vehicle has declared it a total loss. Now again, that phrase has different meanings to different people. As far as the insurance company is concerned, it boils down to repair costs.

Spend As Little As Possible

A top priority of any insurance company is to spend as little as possible satisfying customer claims. There’s no need to fault them for this. Insurance companies are businesses. They exist to make a profit. If they can’t do so, they can’t stay in business. Their customers would be driving around without insurance.

Given that controlling costs is a priority, insurance companies always look for the cheapest way to settle a claim. So if an insurance adjuster determines that repairing a damaged car would cost more than replacing it, the car will be declared a total loss. The insurance company effectively takes ownership of the car and pays the customer an amount equal to its market value.

There are two reasons an insurance company would total a car:

• Repair Cost – Again, a car is totaled if it’s estimated repair cost is greater than its market value.

• Safety Concerns – An insurance adjuster may total a car if he suspects that it would be unsafe to drive even after repairs are made.

The safety issue is also a liability issue. An insurance company doesn’t want a customer driving an unsafe car because, for their part, they could be held liable should an unsafe car they allowed back on the road be the cause of another accident.

Insurance Companies Pay Market Value

When a car is totaled, the insurance company pays to replace it. However, the amount they pay is based on the current market value of the car. It is not based on the cost of replacing it with a new car. There’s a big difference.

You might drive a brand-new car worth $25,000 off a dealer’s lot. As soon as you hit the street, the car loses at least some value. A year from now, it might only be worth $20,000. Should you total it, your insurance company will only pay you that amount.

Insurance companies consider everything from depreciation to body damage to mechanical problems. Adjusters do their best to determine how much the car was worth prior to its accident. That’s the amount they pay.

Only with Collision Insurance

It’s important to note that everything you read here only applies to cars covered by collision insurance. Collision coverage is the coverage that pays for accident damage. It doesn’t pay for personal injury or liability claims. Likewise, liability insurance doesn’t pay for physical damage to a car.

If you don’t carry collision coverage on your vehicle, it won’t matter how much it’s worth in the event of an accident. Your insurance company will not pay to repair or replace it. You have to purchase collision coverage before any of this applies.

Now you know why an insurance company might total your car even with minimal damage. If repairing it costs more than replacing it, the insurance company would rather total it and buy you a new car.