What Does Total Loss Mean?
In the context of insurance, when a property or an asset is destroyed beyond repair and nothing of value is left, this is termed as a total loss. Since the essence of insurance is to reinstate the claimant to the condition of pre-loss, the policyholder is reimbursed with an amount equivalent to the insured property, depending on coverage limits and claim validity.
Insuranceopedia Explains Total Loss
Consider a car insurance policy. Assume the policyholder’s car rams a barricade and explodes into flames, or it experiences any other form of accident that extensively damages the car. When the insurance firm accesses the damage and discovers the cost of repairing the car to its pre-loss state is higher than its book value, then they will declare it a total loss. Any time the cost of repairing the property exceeds a set percentage, such as 80 percent, of its value, then it is considered a total loss.
Note that before paying out the actual cash value or replacement cost to the policyholder, the insurance firm considers many factors, such as its pre-loss condition, its age, the cause of the accident, mileage, its structural integrity, and any other applicable deductions, among many others. Once the policyholder is paid for the total loss or the car is written off, the title is transferred to the insurance firm.