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What Is Actual Total Loss?

Actual total loss is a loss that occurs when an insured property is destroyed or damaged to such an extent that it can be neither recovered nor repaired for further use. Often, an actual total loss triggers the maximum settlement possible according to the terms of an insurance policy. Actual total loss is also known as “total loss.” Sometimes, people will refer to a piece of property that cannot be salvaged as “totaled.”

In these cases, the insured party should qualify to receive a payout from the insurance company for the full insured value of the property. There can be complications, though, and a maximum settlement is never guaranteed.

Understanding Actual Total Loss

Occasionally, property covered by insurance can become destroyed or damaged to such an extent that it can no longer be used or reasonably salvaged. Whether it was caused by theft, natural disaster, an accident of some sort or something else, the insured party should qualify to receive a payout from the insurance company for the insured value of the property.

Actual total loss can be contrasted with constructive total loss, which occurs when a property is technically only partly damaged but increasing damage seems unavoidable, or the property has still been rendered unusable and beyond fixing. In such cases, the cost for the repair of an item – a house, boat, or car – is deemed to be more than the current value of that item. As a result, the insurance company may also provide a payout for the insured value of the property.

Example of Actual Total Loss

Suppose there’s a hurricane heading for the coast of North Carolina. Hurricane Widget is a Category 5 storm and has been causing storm surges up to 15 feet high as it travels up the coast. Unsurprisingly, it wipes out numerous houses, including one owned by Bob and Sharon. All that remains of Bob and Sharon’s home is stilts on the beach, meaning the property qualifies as an actual total loss.

Nearby, three miles inland, Kevin and Julie are also impacted by Hurricane Widget. Their house flooded up to the attic and a tree came through the roof. Although the house is still mostly there, this would be considered a constructive total loss because the structure has been rendered unusable due to damage.

Limitations of Actual Total Loss

Bob and Sharon, and other victims of natural disasters, usually qualify to receive the full value of the insured property that was completely destroyed. However, there can be complications, and a maximum settlement is never guaranteed.

Insurance companies lose money when paying out the total insurable value (TIV) and, as a result, won’t do so until they are completely satisfied that all terms have been met. Adjusters have the right to ask for proof of loss and will usually get the insured parties to compile a list of every item destroyed. Proving that the house was obliterated is relatively simple. Accounting for all the contents contained within it less so, particularly if receipts and all other evidence was destroyed by the hurricane.

Settlement amounts also hinge on the type of coverage protecting the destroyed property. In the case of an actual total loss, many people assume they will automatically receive the full amount outlined in the policy declarations page. What they fail to realize is that the key points summarized in the opening page refer to the maximum amount that can be paid.

A closer look at the document should reveal more details about the type of policy. Within the detailed specifics, the insurer might agree to cover the cost of replacing the item or fork out what is known as the “actual cash value” (ACV).

Actual Cash Value (ACV)

Actual cash value (ACV) is the depreciated value of the property at the time of the loss. In other words, it means the sum to be paid out reflects the amount that could be fetched for the item if it were to be sold secondhand or as-is.

In the case of an automobile, the ACV will consider its mileage, and everyday wear and tear to determine it’s worth. This inevitably means that the insured will receive less than what they paid when purchasing the vehicle, potentially making it difficult for them to go out and buy a similar model.

Unsurprisingly, the most expensive premiums are often attached to the replacement cost rather than the actual cash value option.

Replacement Cost

As its name implies, replacement cost provides the insured with the necessary money to replace the item that was destroyed. Such payments can take a while to arrive and will generally be distributed only after the insured party has already purchased a replacement.

Source: Daniel Liberto, for Investopedia


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