Throwing the Baby out with the Bathwater
Totaling a car just because it has non-collision damage is a chronic and costly mistake.
By Ira Katz
Most insurance companies are very good at properly identifying vehicles that are totaled in collisions. After all, what adjuster would total a $15,000 vehicle that sustained just $3,650 in damage? However, when it comes to non-collision-damaged vehicles, many adjusters and insurance companies simply declare the same $15,000 vehicle a total loss despite the fact that skillful repairs might cost less than $4,000. The category of non-collision losses encompasses damage from fire, smoke and water. It also includes contamination by mold or biohazards, and nasty odors that result from food, fuel spills, flood or other water damage.
If the cost of restoring is advantageous, why are these vehicles so readily declared a total loss? There are three basic reasons. First, non-collision claims are typically low in frequency, and companies often are unfamiliar with the alternative to totaling. Many claims departments settle for a decent salvage return without much, or any, consideration for restoration. If they only knew that many of these vehicles can be restored for a fraction of the replacement value, they would probably reconsider the decision.
Second, there seems to be a general lack of knowledge about proper restoration procedures and doubts about long-term results. After all, many skilled repair facilities have attempted to fix these vehicles in the past and have failed, leading to rust, electrical corrosion, and/or electrical motor failure. Done improperly, repairs can also leave the smell of flood damage or other contaminants that lingers even after all the interior parts have been replaced.
The key issue with a non-collision loss is that the vehicle cannot be properly restored using traditional collision repair methods. Moreover, the principal rule of collision damage estimating—damage must be visible and verifiable—does not apply. This rule is actually the cause of many failed restoration attempts. The fact is that many contaminants are microscopic and cannot be easily identified or eradicated without specialized care.
A third reason for declaring a total loss instead of pursuing repair is the expediency of offering a total-loss settlement to an insured on the front end of a claim. Many of these non-collision losses result from a catastrophe, such as localized flooding events. In such situations, insurers streamline their processes and move scores of claims in a short period of time. Imposing restoration-adjustment efforts without any advance planning would most likely bog down the workflow and throw a monkey wrench into an otherwise smooth operation.
A Classic Scenario and a Classic Car
As the Red River spilled over its banks in North Dakota, a vehicle owner was faced with the choice of what to save and what to leave behind. He had no choice but to abandon his prized 1968 Camaro to the impending flood. When the river receded, it became clear that water and silt from the river had entered the passenger compartment and nearly reached the dash panel. What was also clear was that the damage was substantial.
After completing inspection of the vehicle, the adjuster quickly wrote it off as a total loss and sadly informed the policyholder that nothing could be done to salvage the car. The policyholder was very upset. He purchased the car new and had since finished a ground-up restoration. Reluctantly, the policyholder watched as his top toy was loaded onto a flatbed and towed to the salvage lot.
After completing the market research on the value of this classic Camaro, the adjuster determined the actual cash value to be around $25,000 and presented the offer to the insured, only to find out the owner thought it was worth closer to $40,000. After all, he had invested a lot of time and money into the car. Because it was insured for actual cash value instead of a stated value, there was an ensuing debate regarding payment.
What happened next turned out to be very surprising for both the vehicle owner and the insurance company. As a service to the insured, the carrier agreed to call in a professional restoration company to determine the extent of the damage and the possibility of restoring the car. Only six days later, the vehicle was completely repaired and returned to the owner, who was extremely satisfied with the results.
Estimated Replacement Value for a 1968 Camaro: $25,000
Cost to Restore the Vehicle: $2,200
Company and Policyholder Happiness: Priceless
Comparing Loss Costs
A comparison of loss costs is the best way to illustrate the savings offered in many cases by choosing restoration over totaling. Using the example of a vehicle that has a $15,000 actual cash value (ACV) and the average restoration amount of $3,650, see Tables 1 and 2 for what we find.
The direct overpayment on this total-loss settlement to the insurer is $8,700 when compared to the restoration cost. And we haven't yet examined loss adjustment expenses.
Total-loss processing contains added costs not assessed in a repair settlement. These include the cost of obtaining properly executed documentation and its delivery fees, as well as time spent negotiating with the lien holder, obtaining a lien release, dealing with upside-down loans, obtaining a valid vehicle title, and the additional cost to manage and process the claim and salvage. It's reasonable to figure three hours additional adjuster labor into processing a total-loss claim as opposed to a repairable vehicle, and that is not inclusive of technical support, supervision and management or overhead.
There is also the hidden cost of having your company's funds tied up in salvage until the proceeds are returned and posted. For each vehicle, it is essentially the value of having $4,500 cash locked up for three months in a salvage yard.
When you add it all up, the cost to deem a repairable vehicle a total loss can be nearly three and a half times as much as a proper restoration solution. A reasonable baseline of an overpayment of about $8,700 on direct losses per incorrect decision, as established above, could lead to as much as an $8.7 million additional hit to the carrier if there are just 1,000 incorrect total-loss decisions a year on non-collision-related damage. And it might be mostly unnecessary. Take a look at the salvage auctions, and you'll routinely see non-collision-damaged vehicles that were totaled being sold for a great return. The main reason they aren't being parted out or destroyed is that they were repairable at a reasonable cost and resalable at a profit.
The Customer's Response
Often, there's an assumption that all insureds want a wrecked vehicle totaled. That might very well be true…until they learn the actual cash value they will receive. Add to their consternation the fact that they might have to obtain a new car loan at a higher interest rate, purchase a more expensive vehicle, or may not qualify for a car loan at all, and the attractiveness of a total loss loses its luster.
A used-vehicle purchase could result in considerable hidden mechanical and unexpected maintenance costs, and your insured could be faced with a real financial burden that was unplanned. Insurers have historically answered consumer complaints by quoting policy language, such as explaining that their auto insurance covers the vehicle for ACV and does not cover any consequential or subsequent loss. Such post-settlement concerns may appear not to be the carrier's concern. Or are they? Considering the reality of vigorous competition in the marketplace, the value of customer loyalty and the cost to obtain new customers, concern is warranted, and some cases bear additional review.
Taking a Second Look
The decision toward declaring a total loss has been encouraged by several factors, including the stigma of restoration failures done by unqualified repair facilities and the unsuccessful removal of mold, mildew or other contaminants that can make the car a breeding ground for noxious odors and health hazards. The good news is that there are vehicle restoration companies that have developed specific restoration techniques and procedures, including the use of water-based hypoallergenic chemicals, that obliterate smells and irritants. High-quality restoration facilities deal with the corrosion, performance and appearance issues that traditional repair shops can miss.
The approach to restoration is fundamentally different from standard collision repair. All the components in the contaminant-affected zone (CAZ)—including the upholstery, wiring and electrical systems, right down to the vehicle chassis—are treated because they are permeated with potentially destructive elements. When a restoration company is hired to restore a non-collision-damaged vehicle, the results are similar to a successful collision repair for about a third of the cost of totaling out the vehicle.
Ira Katz is president and CEO of Bensenville, Ill.-based Comprehensive Insurance Services (CIS). Shawn Renzo, CPCU, AIC, is vice president of sales for CIS and can be reached at email@example.com.