By Ty McDuffey, J.D. | Legally reviewed by Katrina Wilson, Esq. | Last reviewed August 14, 2023
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If your car was totaled after an auto accident, but you still owe money on it, you'll need to examine your insurer's settlement offer closely. Insurers have an obligation to compensate you for the value of the vehicle you lost. They do not have to pay enough to purchase a replacement or to cover the amount of the loan outstanding on your wreck.
Many people have heard stories about someone being "upside down" on their house, meaning they owe more on their loan than the value of the house if they sold it. Did you know that the same thing can happen with a motor vehicle?
The following article provides some insight on how to deal with car accident settlements for a totaled vehicle with an outstanding car loan.
The actual cash value (ACV) placed on your car is central to the problem of a totaled car for which you still owe money. An insurance adjuster will set a value on the damaged vehicle following the accident. The value of the car is based on the condition of the vehicle just prior to the accident.
All cars depreciate in value over time and through use. Both the age and the mileage of a vehicle affect its value. The car's history of maintenance, repair, and parts replacement can all affect the value of your car as well.
New tires, for example, increase the fair market value of a vehicle. Generally, however, even a car that undergoes regular maintenance and is in great working condition will depreciate in value. A prior accident reduces a vehicle's value as well.
The car insurance company looks at various aspects of the car's history. That information helps them come up with a car's calculated value to include in the settlement offer following an accident.
When you receive an offer from the insurer, you should remember that your car loan obligations are not impacted by the vehicle's destruction. You should also look carefully at the vehicle's valuation. If the valuation is fair, you are unlikely to receive a better offer. Accepting the offer also bars you from suing later.
On the other hand, if you have information supporting a larger value on the vehicle, you can try again. You can submit a counteroffer along with any evidence you have to support your position for a higher valuation. Look for other listings similar to your vehicle but with higher prices to help support your argument for a higher offer.
Many of these exchanges may take place before reaching a final settlement. If you and the insurer cannot agree, you will need to sue them in civil court. One important consideration in negotiations involves your state's statute of limitations on civil suits.
Each state sets a deadline by which a lawsuit must be filed or the right to sue is lost. You should be aware of your state's statute of limitations because negotiating a settlement is nearly impossible after losing the right to sue.
One interesting aspect of valuation is that it impacts whether a vehicle is a total loss. Each insurer sets a percentage of the total value, beyond which a car is a total loss. Many states set the minimum percentage permitted, often around 70 percent. Individual insurers may have total loss percentages higher than the state minimum.
If you are able to argue for a higher value for your vehicle and the cost of repair does not change, then it is possible that you may be able to reduce the percentage such that the insurer is required to repair your car.
A term to familiarize yourself with when dealing with a totaled vehicle with an outstanding car loan is gap insurance, which stands for “guaranteed auto protection." Gap insurance covers the difference–or the 'gap'–between the actual cash value of your vehicle and the current outstanding balance on your loan or lease if your vehicle is totaled in an accident.
Suppose your auto insurance declares your vehicle a total loss and offers a payout based on the car's actual cash value. In that case, it could be significantly lower than the loan balance, especially for a newer vehicle that depreciates quickly. That's when gap insurance comes into play.
If another driver is at fault in the accident that totals your vehicle, their insurance should cover your property damage up to the policy's limit. However, they have an obligation to compensate you only for the ACV of your car at the time of the accident, not the amount you owe to your lender. If their coverage is not enough to cover your outstanding loan, and you do not have gap coverage, you will need to pay the remainder out of pocket.
Remember, you will usually need to pay your deductible before your insurance coverage kicks in. The deductible is the amount you've agreed to pay out of pocket towards a claim. For example, if the settlement from your insurance company is $15,000 and you have a $1,000 deductible, you'll receive $14,000.
An insurance claim involves a request for compensation based on the terms of your insurance policy. The payout from an insurance settlement may not cover the outstanding loan on a financed car, leaving you with remaining loan payments.
An appraiser from the insurance company will typically use the Kelley Blue Book or a similar resource to determine the actual cash value of your vehicle. They will consider the car's condition, mileage, and other factors at the time of the accident. The insurance payout is based on this ACV.
Depending on state law, a vehicle declared a total loss may receive a salvage title. A salvage title means that the vehicle has been damaged to the point where most insurance companies would consider it a total loss.
After your car has a salvage title, you essentially have three options:
Regardless of the route you choose, check your local and state regulations for guidance on transferring a salvage title.
In some states, the insurance company is also required to pay the sales tax on the replacement vehicle as part of the settlement check. However, this can vary, so it is important to check your state's specific requirements.
The most reliable way to check your state's requirements for sales tax after a total loss is to contact your state's Department of Motor Vehicles (DMV) or an equivalent state agency. This agency can provide you with the most accurate and up-to-date information. Additionally, your insurance adjuster should be familiar with these regulations and able to guide you through the process.
Some auto insurance policies offer new car replacement coverage. This type of coverage typically pays to replace your totaled vehicle with a new one, minus your deductible. It's a step above typical collision coverage, which only pays the ACV of your vehicle at the time of the accident.
When shopping for auto insurance, you can ask if the company offers new car replacement coverage. Not all companies do, and it's usually only available for new cars or cars that are a few years old. There may also be additional eligibility requirements. For instance, some insurance companies require that the car has a certain amount of miles or less to qualify.
To see if you already have this coverage, check your policy documents or contact your insurance agent. It should be on your policy's declaration page under your coverage types. If you can't find it or are unsure, your insurance agent can clarify this for you.
As always, when considering any changes to your coverage, it's worth discussing with your agent to fully understand the cost and what is or isn't included. This will help you make the most informed decision based on your specific circumstances.
There are a lot of important considerations when your car is totaled and you still owe money on it. Professional assistance can help clarify your rights and help you determine the best way to proceed. Contact a qualified local personal injury lawyer to learn more about how they can help protect your interests after an accident.
Contact a qualified auto accident attorney to make sure your rights are protected.
Get tailored legal advice and ask a lawyer questions about your accident. Many attorneys offer free consultations.