[LEGAL] PERSPECTIVE by James A. Castleman, Esq.
An Insurer’s Decision to Total a Car Recently, it was reported to me that some insurers have become more aggressive in declaring damaged vehicles to be total losses. For collision repair shops, that may mean losing a job sometimes. But for the real party in interest - the vehicle owner - does it really make a difference? After all, the insurer is required to pay the claimant the full actual cash value (ACV) of a totaled vehicle, supposedly putting them in the same position that they had been in prior to their loss. However, the reality is that a car owner is often not really put back into the same position when an insurer pays for a total loss. First, once a car has been driven off of the showroom floor, the vehicle immediately decreases in value, no matter how recently it was purchased, and it is usually impossible to find a replacement that is exactly the same as the totaled vehicle. Even when a car has just been purchased, insurers are still likely to pay less than their insured paid for the car, since it is now a used car rather than a new one – or at least, the car is more used than when the insured purchased it. Second, most car owners are familiar with the quirks of their particular vehicle and know the exact condition that it was in when it sustained damage; however, that can never be the case for the replacement vehicle. Whether or not you have a CARFAX report, you just never know exactly what you are buying, even if it is a new car or a dealer-certified used car. Third, when someone buys a car, they usually finance it. When a loss occurs two years later, the amount of the outstanding car loan often exceeds what the insurer will pay out as the current ACV of the totaled vehicle. What is the insured supposed to do? Not only do they no longer have the car that they bought, they now are put in a position where they are looking for a replacement car, but they also still owe a balance to the finance company for the totaled car. Does an insured have the right to challenge an insurer’s decision to total their car? Well, maybe, or maybe not, depending on the circumstances. Some Background Historically, Massachusetts insurers and the Division of Insurance (DOI) have taken the position that an insurer has the sole and exclusive right to make a determination of whether to declare a damaged vehicle a total loss. In fact, the standard Massachusetts private passenger auto insurance policy says, in regard to first party collision and comprehensive losses: “We will, at our option, repair the auto, repair or replace any of its parts, or declare the auto a total loss.” [emphasis added] Notably, another section of the policy also says: “If we pay for the total loss of your auto, we have the right, if we so choose, to take title to that auto.” [emphasis added] Despite these statements in the insurance policy, it is not really true that an insurer always has absolute discretion as to whether to declare a vehicle to be a total loss, for a number of reasons:
First, the policy language does not apply to third-party property damage claims. For third-party claims, a claimant can always dispute a determination by the responsible party’s insurer that a car has been totaled. Further, even if an insurer does declare a vehicle to be a total loss on a third-party claim, the claimant may have a broader claim for damages, since what the claimant is entitled to be paid is not limited by the insurance contract. Rather, a third-party claimant is entitled to collect all reasonably foreseeable damages that result from the negligent actions of the person who caused the loss. In such a case, it may not be beyond the realm of possibilities to be able to collect damages beyond the ACV of the damaged vehicle – perhaps loss of use damages, perhaps additional costs related to buying a replacement vehicle while still needing to pay off an existing car loan, or perhaps other damages that the claimant can legitimately establish have been caused by their car being damaged. None of this is guaranteed, but it is at least a possibility on a third-party claim. Notably, on a third-party claim, the insurer never has the right to take title to a totaled vehicle, unless the claimant agrees. But if the claimant retains title, the salvage value of the vehicle must be considered in determining the value of the claimant’s loss. Second, despite what the insurance policy says, there are legal standards that an insurer is required to meet in order to be able to declare a vehicle to be a total loss. One major standard is set out in the Auto Damage Appraiser Licensing Board (ADALB) regulations at 212 CMR 2.04(1)(f ): “Whenever the appraised cost of repair plus the estimated salvage may be reasonably expected to exceed the actual cash value of a vehicle, the insurer may deem that vehicle a total loss. No motor vehicle may be deemed a total loss unless it has been inspected or appraised by a licensed appraiser nor shall any such motor vehicle be moved to a holding area without the consent of the owner. A total loss shall not be determined by the use of any percentage formula.” In other words, an insurer’s appraiser legally cannot arbitrarily declare a vehicle to be a total loss. They must determine that the cost of repair plus salvage value is likely to be more than the ACV of the damaged vehicle prior to the loss. Additionally, the insurer cannot legally declare a vehicle to be a total loss, unless a licensed appraiser has inspected the vehicle and determined that it meets the standard for a total loss as set out in the regulation. Another major standard related to total losses is contained in DOI regulations that set out standards that insurers are required to use when determining repairs needed for damaged vehicles. In particular, under those regulations at 211 CMR 133.05, if a vehicle is likely to be a total loss, then the insurer in all cases MUST make a detailed analysis of the ACV and also must determine the salvage value of the vehicle. In determining ACV, the insurer is continued on pg. 38
34 June 2022
New England Automotive Report
