Ask the Expert: How and Why Do Insurers Total Vehicles?
We’re finding that insurers are totaling vehicles when the damages are as low as 40 or 50 percent of the vehicle’s pre-loss value. This often places our customers in a difficult situation when they prefer to keep their vehicle and/or owe more on it that the insurer says it’s worth. How and why do insurers do this, and what rights do consumers have when it comes to keeping their vehicle?
First of all, you’re not “the only one” who has recognized this trend, as I’ve heard this from other collision repairers across the country. There are several reasons for this.
In many instances, the insurers are attaining very high salvage recovery for several reasons including, but not limited to: settling the claim below state thresholds, avoiding “total loss” titles; rebuilders paying premium prices for repairable vehicles with clean titles; overseas buyers paying premium prices for salvage; insurers selecting high-value candidates for high-demand salvage prices.
Insurers are settling total losses below fair market replacement value often well below true market value, thus reducing their pay-out in the name of “cost containment.” My company, Auto Damage Express, sees a pattern of $1,200 to $1,500 underpayments per claim on average. High salvage bids enable the insurer a higher recovery and significant reduction in overall claim expense. Also, settling total losses is generally quicker and reduces rental car/loss of use expense. Plus, supplemental costs for hidden loss-related damages are avoided, claims for Diminished Value are avoided, and claims are settled and closed faster, reducing time, internal administrative activities and expenses.
The Consumer
While all this may surely be expedient and economically beneficial to the insurers and help keep their costs down, it often does little to help the consumer whose vehicle is damaged and whose life has been turned upside down and is in need of assistance.
Most consumers are ill-equipped to deal with auto claims and, as such, they often look to the insurer or their agent for direction presuming that the insurer will be there for them in their time of need. After all, who else can they trust and turn to?
The States
In most states, insurers are given the privilege to do the business with the understanding that they have a duty to do so in an equitable (“just and fair”) manner.
Because insurers are placed in a position of “public trust” (people rely upon them for guidance), most states have guidelines the insurers have to follow. These are generally referred to as “fair claims practices,” which mandate that insurers must act in “good faith.” This simply means that insurers need to be virtuous in their dealings and unbiased, fair and just in their settlement practices.
Those that fail to conduct themselves properly can be found to be in breach of their policy contract and/or acting in ‘bad faith” and can lose licensure. Or, in some egregious cases, significant fines can be levied and the insurer can lose the privilege and ability to conduct business in that state.
The problem occurs when insurers place their own economic interest before the consumers. This is often found when the insurer makes and intentional lowball replacement value settlement offer and then threatens the consumer to either accept it or the insurer will stop paying rental car fees and storage charges, etc., in an efforts to pressure and coerce the consumer to accept the low offer.
First-Party Claim
In a first-party claim (one making a claim against their own policy), the insurer has the contractual option to either repair or replace the insured property. The vehicle owner may then have to negotiate a fair replacement value and settlement amount.
Should an impasse in settlement occur, this generally results in either party invoking the policy’s “appraisal” clause provision within the policy. Or, the vehicle owner may seek legal counsel to assist them in attending a fair settlement. Of course, these two options cost the vehicle owner an out-of-pocket expense with no guarantee of prevailing or that the end result will exceed the added cost or not to be worth the time and effort. Many consumers may not be able to wait for a fair settlement to get a replacement vehicle and as such be compelled to accept a lower settlement from the insurer just to get their life back on track.
For those making a claim against their own policy, their rights may be limited by the policy contract.
Third-Party Claim
For those who seek recovery from the at-fault driver (third-party claim), they are not governed by any policy contract and so the state’s guidelines regarding total loss handling should be followed. In Florida, if the cost to repair exceeds 90 percent of the vehicle’s pre-loss value, the vehicle may be repaired if both the insurer and the owner agree to repair it. If they do, the vehicle’s title must be surrendered to the state and be designated/reissued as a “rebuilt total” but only after an inspection of the repaired vehicle and receipts for the major parts used in the repair. Should the damages exceed 100 percent of the pre-loss value, the vehicle will be designated as a non-rebuildable total loss. The title will be sent to the state and destroyed (never to be reissued), and a “Certificate of Destruction” will be issued by the state to the owner.