Actual Total Loss Details

When your insured asset gets damaged, you can claim reimbursement to repair the property from your insurance company. However, there may come a time when the asset gets damaged, so much beyond repair -- salvaging the item is not even possible. In this case, you have the right to claim the maximum settlement possible according to your coverage policy. When this happens, your asset suffers an actual total loss.

Actual total loss, also known as "total loss," can happen due to many possible things. Some of the most common causes include natural disasters, fatal accidents, as well as theft. No matter the reason, the insurance company should give the proper payout amount to the qualified claimant for the loss. With that said, whether the money received is enough to re-purchase the same asset or not depends on which coverage option the claimant takes.

Insurance companies generally divide coverage options based on two indicators: actual cash value and replacement cost. Actual cash value equals the carrying value of the asset before it gets damaged or stolen. It refers to the asset's value if you were about to sell it before the actual total loss happens. A pricier coverage option is replacement cost, which equals the amount of money needed to buy the same model of the asset brand-new, according to the current market price.

Example of Actual Total Loss

Let's say that you own a car that recently was wrecked due to a flood. Since the car is insured, you can claim a settlement for the destroyed car. Now, the amount of money you will get depends on what kind of coverage option you chose when you signed up for the insurance (actual cash value or replacement cost).

If it's based on actual cash value, you will get the amount of money equaling the estimated price of the car just before it got destroyed, in other words, the price of the car as if it were to be sold second hand. Insurance companies usually calculate actual cash value based on the car's current market price, wear and tear, and mileage. Unfortunately, this means that whatever amount you receive from actual cash value normally won't be enough to re-buy the exact car model. If you want to get the same vehicle, you need to add extra money from your own pocket.

Replacement cost, however, is a different story. Since replacement cost uses the car's current market price, the money received should be enough to cover the cost of re-purchasing the car, though it is not without drawbacks. Replacement-cost-based coverage option usually incurs a more expensive premium. Not only that, the payment often takes longer to arrive; you will have the total amount only after you, as a claimant, already purchase a new car.

Actual Total Loss vs. Constructive Total Loss

Constructive total loss happens when the repair cost of an insured asset exceeds the item's current value or the insurance limit. Property owners who suffer from constructive total loss can still cover some repair expenses using the insurance money. Still, it might be cheaper to buy another item of the same model. This is different from an actual total loss that deems the asset to be unrecoverable no matter what.

As an example, let's imagine an insured ship. If the ship gets destroyed beyond repair or sunk, then actual total loss happens. On the other hand, if the ship suffers major damages but can still float and is repairable, it is a constructive total loss. This assumes that the repair cost of the ship exceeds its current value on the market.

Significance of Actual Total Loss

Claimants of actual total loss can get the maximum possible reimbursement amount. Naturally, as profit-seeking entities, insurance companies won't like it if they need to pay out the maximum dollar amount every time a claimant declares actual total loss. In that case, they need to make sure that a claimant can fully satisfy the terms and conditions. Adjusters, company agents responsible for evaluating insurance claims, are the ones who ask claimants to provide adequate proof of actual total loss.

Failing to provide proof may result in the claimant not getting a satisfactory settlement amount. Clients need to understand that the amount outlined in the insurance policy declarations page is the possible maximum amount, not the amount of money they will automatically receive. If the actual total loss is unproven, claimants won't get the full reimbursement, but they are more likely to get a portion of the policy.

Things may get worse if a claimant fails to differentiate between actual cash value and replacement cost. For example, if the claimant cannot understand why they would only get actual cash value instead of replacement cost, an unnecessary dispute with the company may occur.