Constructive Total Loss

A constructive total loss is when the cost for repair of an item (e.g., house, boat or car) is more than the current value of that item. It also refers to the insurance claim that is settled for the full value of the associated coverage.

A constructive total loss for a vehicle means that the damage is so extensive that repairs would equal or surpass the cost of the vehicle or its insurance limit. This type of loss is common in a head-on collision or total wreck. About one in seven car accident claims results in a constructive total loss. A constructive total loss is common when a home is destroyed by a serious fire or other severe calamity. In cases where the property is damaged to this point, the insured could potentially allow the insurer to assume all rights over the material good. Such properties are usually demolished, torn down, scrapped or recycled for parts after their policies are settled.

Consider Derrick, who own two new flatbed trailers, trailers A and B, which cost $25,000 and $30,000, respectively. Derrick decided to try to save money on his premiums by insuring his two trailers for only $15,000 each – he figured that he'd be able to repair any damage to the trailers himself.

Derrick then had an accident that caused $12,000 in damage to trailer A and $9,500 in damage to the trailer B. He thought that his $15,000 in coverage would cover his costs to repair the trailers. The claim adjuster, however, determined the accident constituted a constructive total loss on the two trailers and paid $30,000 claim to Jeff from the insurance company.

Derrick could have repaired his two trailers for $30,000, but because they were a constructive total loss, he had to surrender the titles of the trailers to the insurance company, meaning that he no longer owned the trailers and could not repair them. The claim adjuster was able to sell the trailers to a salvage buyer for $40,000. He was able to reimburse the insurance company for Derrick’s claim and generate a profit of $10,000, which was given to Derrick.

In the end, Derrick was left with $40,000 to replace $55,000 in equipment. However, if Derrick had used a more accurate stated value, his insurance premium would have been higher, but in the case of an accident, his trailers would have been restored to pre-loss condition, even in the case of a constructive total loss.