A total loss is defined as an auto that is physically unrepairable, stolen, or damaged to the extent that the cost of repairs plus the salvage value equals or exceeds its actual cash value (ACV). Actual cash value is the market value of the vehicle immediately prior to the loss. Also considered in the settlement process are title fees and taxes. Such costs are part of the ACV with insureds and a negotiated item with third party claimants in most jurisdictions. Market value is the price that an auto can be expected to bring when sold in a given market.

Claim representatives and estimating personnel must establish the repair cost, ACV, and salvage value of the vehicle in question to determine if that vehicle is a total loss. A total loss exists when the estimated repair cost exceeds the greater portion of the estimated ACV of the vehicle. Generally, 60% is an acceptable guideline above which the vehicle is considered to be a possible total loss. Vehicles damaged to the 60% extent are referred to as “borderline” totals.

Many losses can quickly be determined “totals.” Others require the completion of an estimate. If the adjuster decides to “total” a vehicle with damage in the 60% range, he or she should complete a detailed inspection of the vehicle to arrive at the ACV.

Situations do arise where vehicles are considered total losses when damaged to a lesser extent. Vehicles that are submerged to the point where water enters the dashboard often are classified as “obvious” or “dashboard” totals. The salvage value of such a vehicle is generally very high, because the sheet metal components incur little damage from being temporarily submerged. However, the potential does exist for costly damage to electrical components which generally does not immediately appear.

When confronted with a total loss, the claim representative must consider the length of repair time, potential hidden damage, and—if the vehicle is not repairable to its pre-accident condition—possible diminution of value.

How long a possible repair may take is especially important in claims involving liability to a third party. That third party will have a valid loss of use claim. And, unlike a first-party insured whose loss of use claim is limited by the policy, third party claims are only limited by what a jury would consider appropriate. In the case of a third party claimant, the courts have ruled that the expense does not have to be incurred to be recoverable.

Hidden damage may exist when a car is damaged to the extent that it is in the borderline range. As a practical matter, there is usually no way to determine hidden damage on heavily damaged vehicles until dismantling is completed. The experience and expertise of the estimator, claim representative, and repair person must be relied upon to consider some allowance in the estimate for the existence of potential hidden damage.

Diminution of value claims result when repairs do not restore the value of the repaired vehicle to the market value it had immediately prior to the accident.

Vehicle evaluation is not an exact science. A number of tools and resources are available to the skilled claim representative to establish the ACV of a vehicle and conclude a fair settlement. Often it is more time consuming and difficult to reach an agreement with the owner on the ACV amount, than to establish the ACV offer.

The National Automobile Dealers Association (NADA) publishes the Official Used Car Guide each month. This guide covers a specific geographic region and includes vehicles seven years old or less. The guide book prices are compiled from figures provided by the association's dealers. These dealers are generally the larger dealers and as a result their prices include overhead costs such as: used car warranty costs, general minor repair costs, and used car set-up costs incurred before putting the car on the lot for resale. For these reasons, the prices found in the guide are generally considered to be in the upper range of values for vehicles. Since the guide covers such a large area, the prices quoted may be high or low for a more specific market area.

The NADA book is one resource to help establish a “guideline as to the price range.” The book should not be used as the sole means of establishing ACV and making a settlement offer.

When dealing with vehicles older than seven years, another guide is available from NADA. The Official Older Used Car Guide is published on a national level three times a year. In includes vehicles from eight to eighteen years of age. Again, the adjuster should not rely on this guide as the sole means of establishing ACV on older vehicles.

One other guide, Cars of Particular Interest, contains information on older, collector type, or exotic vehicles. Again, the adjuster should consider this resource as a guide. There are several other reputable automobile price guide books on the market for vehicles of all ages.

The most reliable way to establish the ACV in a local market is through a combination survey of used car dealers and private sellers. Local daily newspapers, weekly suburban publications, buy-and-sell type publications, and magazines published just for vehicles are common sources. Ideally, the claim representative will conduct a market survey.

Most often the adjuster turns to an outside vendor for help in establishing ACV. These vendors collect local market information by conducting actual dealer lot surveys or reviewing local classified advertising, or a combination of the two. Market survey information is available to the claim representative on a computer network. Information on three or four cars is usually immediately available for comparison purposes.

The claim representative must make adjustments to quoted prices from all sources, in order to account for differences in equipment and condition of the damaged vehicle and the comparable vehicles that were located. The claim representative's objective is to establish a fair range of values. He or she can establish such a range, based on the market survey mentioned above.

After establishing a range of values for the damaged vehicle, the adjuster begins settlement discussions with the owner. The use of a range involves the establishment of a minimum and a maximum value amount. The range of values must be legitimately established. If not, a company might be in violation of an applicable Unfair Claim Settlement statute, if the adjuster begins the negotiating process with the owner at the minimum.

Unfortunately, the best efforts of the claim representative do not always establish a settlement offer that is acceptable to the vehicle owner. A third party claimant's recourse is a suit or some form of arbitration. A first party may demand appraisal under the terms of the contract.

Part D, “Coverage for Damage to Your Auto” in the typical personal auto policy contains the appraisal section. It reads:

“A.     If we and you do not agree on the amount of loss, either may demand an appraisal of the loss. In this event, each party will select a competent appraiser. The two appraisers will select an umpire. The appraisers will state separately the actual cash value and the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding. Each party will

1.     Pay its chosen appraiser; and

2.     Bear the expenses of the appraiser and umpire equally.

B.     We do not waive any of our rights under this policy by agreeing to an appraisal.”

The same section of the policy provides a “Limit of Liability” for applicable first party claims. The policy states:

“A.     Our limit of liability for loss will be the lesser of the:

1.     Actual cash value of the stolen or damaged property; or

2.     Amount necessary to repair or replace the property with other property of like kind and quality.

     However, the most we will pay for loss to:

1.     Any “non-owned auto” which is a trailer is $500;

2.     Equipment designed solely for the reproduction of sound, including any accessories used with such equipment, which is installed in locations not used by the auto manufacturer for installation of such equipment or accessories, is $1,000.

B.     An adjustment for depreciation and physical condition will be made in determining actual cash value in the event of a total loss.

C.     If a repair or replacement results in better than like kind or quality, we will not pay for the amount of the betterment.”

For an in-depth discussion of the physical damage portion of the personal auto policy, see {Idl:PAP PART D.xml^“Personal Auto Policy—Part D”, Personal Lines Volume, Personal Auto section, page A-6^Personal Auto Policy—Part D].

In dealing with total loss situations, claim representatives often become involved with lienholders and lessors. Companies are required by law to protect these parties up to their interest, but not over the value of the collateral. The policy provides protection to anyone holding a valid interest in the subject property. Settlement practices to protect these interests include the issuance of drafts that are payable both to the named insured and the lienholder.

As leasing vehicles has gained in popularity, more and more often the situation is encountered where the value of the vehicle is less than the amount owed to the lessor or lienholder. This situation is commonly referred to as being “upside down” on the note.

This happens most often when the purchase or lease price of a relatively new vehicle includes in the finance package credit life insurance and/or the price of an extended warranty. Little, if any, down payment is a common occurrence in the case of an upside down note.

While the unused portion of insurance policies and warranty agreements are refunded on a prorate basis, interest refunds are not calculated on a prorate basis. Prepayment penalties are common. Termination of the lease prior to the time stated in the lease agreement usually calls for a “penalty” which is not compensable under the contract.

Note to agents: ISO now has an endorsement available, PP 03 35, that agrees to pick up the extra amount over an ACV settlement. Please see Endorsements Used With Personal Auto Policy.

For these reasons, the best way to handle such total loss situations involving leased vehicles is through a substitution of collateral. The adjuster locates a replacement vehicle and buys it with the insurance proceeds. The substitute vehicle takes the place of the one in the original lease or finance agreement. Dollar differences may arise which are the responsibility of the purchaser and must be resolved with the lessor or lienholder.

Diminution of value is the difference in market value immediately before and after damage to property. The cost of repairs is generally accepted as the measure of damages although loss of value may act as evidence of damage.

Historically courts have ruled that loss of value is not payable if the damaged property could be repaired to its pre-accident condition without any loss in value. In such cases, repair costs afforded the best remedy. Later, some courts adopted the theory that if the property could not be restored to its pre-accident condition, the owner may (if desired) accept the costs of repair plus loss of use, and the difference between the value before and after the damage was incurred.

Loss of value cases are most commonly encountered when the borderline total issue is involved and the decision is made to repair, or when a vehicle is repaired in an improper or substandard manner.

As discussed, the cost of repair plus loss of use is not mutually exclusive of a loss of value remedy. If a party can prove a diminished value after repairs are concluded, the party is entitled to both measures of damages. The idea is to make the owner whole again. If the only way this can be accomplished is through a combination of damages, such damages should be paid.

If the damaged property is repaired and the value of the vehicle is more than prior to the accident, betterment becomes an issue. The PAP does not pay for the amount of any betterment.

ISO has recently issued a new endorsement that adds an exclusion to the physical damage coverage section (part D) of the PAP; the endorsement is not yet approved in all jurisdictions. PP 13 01 states that the insurer will not pay for loss to the covered auto or any nonowned auto due to diminution in value. Please see Endorsements Used With Personal Auto Policy.

The reasoning behind this endorsement is this: an insured, after being involved in auto accident, claims that his auto is not worth what it was prior to the accident even if repaired promptly and professionally. The auto has suffered a loss in value because of the accident and that is a “loss” that is covered under the insuring agreement; besides, such coverage would put the insured in the position he was prior to the loss and that is the purpose of the insurance policy. The insurer is using this endorsement to make the point that part D coverage is for “direct and accidental loss” and that means only actual physical damage to the covered auto and not a loss in value. Since some courts may agree with the insured's interpretation of the meaning of “loss”, and since the PAP had no exclusion that addressed the issue, PP 13 01 was written; a diminution in value loss is now specifically excluded.

The endorsement defines “diminution in value” as “the actual or perceived loss in market or resale value which results from a direct and accidental loss”. Therefore, whether the insured merely believes his car has lost value or has a licensed body shop make a written statement that the covered auto has suffered a certain loss in value due to an accident, PP 13 01 excludes such a loss from coverage.

At this point, it is important to make a distinction between first and third party claims.

In the case of a third party, loss of value is recoverable under the liability coverage. Case law in a minority of jurisdictions also indicates these losses may be compensable under first party collision and comprehensive coverages.

In the case of a third party claim, diminution of value recovery is predicated on legal liability. The insured must have acted in such a way as to be held responsible for the accident (usually negligence) and those acts must have caused the damages for which recovery is being sought.

When repairs are completed correctly and there is still a provable loss of value, then a loss of value claim can be entertained in many jurisdictions. When repairs are not completed correctly and the amount of the initial repair estimate was sufficient to adequately repair the vehicle, then liability for the loss of value does not rest with the insured, but rather with the repair facility that improperly repaired the vehicle.

In the case of a first-party claim, the carrier's liability for any loss of value is based solely upon the obligations it has to the insured under the terms of the policy contract. Note that state laws and insurance regulations are not consistent in dealing with loss of value as a separate item of recovery under physical damage coverages. A working knowledge of the law in the state in question is necessary in order to fairly handle claims of this nature. Contract wording also varies, but most policies provide for “payment of the lesser of the amount necessary to repair or replace the property” in some form.

The words “repair” and “replace” mean the restoration of the vehicle to substantially the same condition it was in immediately prior to the accident. When the repair facility does not properly restore the vehicle to its pre-accident condition, the proper measure of damages is the difference between the value of the automobile before the damage was incurred and the value after it was damaged, repaired, and returned to the owner.

The issue then becomes from whom is this “loss of value” recoverable. Assume that the damage to the vehicle was capable of being repaired to its prior condition; the insured selected the repair facility; and the estimate and supplements were reflective of the fair cost of repair. Under these circumstances, the contract terms have been met and recovery should be sought from the repairer, either in the form of corrective repairs or loss of value.

If the damage was so extensive or of such a nature that it could not be properly repaired, and the carrier insisted on repair, then the carrier is responsible for the loss of value. Obviously, the best way to handle this type of claim is with a proper initial vehicle inspection and estimate. If the vehicle is not repairable, it should be handled as a total loss. Nevertheless, if repairs occur under these circumstances, then a claim for diminution of value may be valid.

Establishing the pre-damage and post-damage market value of the vehicle is often difficult. The policy provides for “appraisal” if the insurer and the insured cannot agree on the amount of the loss. Utilizing the appraisal process is similar to the use of experts in a trial setting. Experts might be considered to be new and used car sales people, auto appraisers, and even auto repairers.

The use of multiple available sources to establish the ACV of an owner's vehicle; consideration of possible diminution of value in the post-accident vehicle; and the payment of every penny owed of the claim dollar (but not one cent more), best serve all policyholders.