Constructive Total Loss

What Is Constructive Total Loss?

An insurer declares insured property to be a constructive total loss when the estimated costs for its repair exceed the insured value of the property. It indicates that the insurer has decided to pay out the insured value of the property rather than pay for it to be restored to its previous condition.

The term also refers to an insurance claim that is settled for the full value of the associated coverage.

In any case, the process reveals the importance of obtaining insurance that covers the full value of the insured property rather than insuring it to a lower level in order to save on the premium payments.

  • A claims adjuster declares property a constructive total loss if its repair estimate exceeds its full insured value.
  • The insurance company then pays the claimant the full insured value.
  • Claimants can lose out if they have failed to insure their property up to full value.

Understanding Constructive Total Loss

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 a total wreck, although it can also occur when an older vehicle with little book value incurs damage.

A constructive total loss is common when a home is destroyed by a fire or another calamity. In such cases, the insured party may allow the insurer to assume all rights over the insured property as part of the claim settlement. Usually, the properties are demolished, scrapped, or recycled for parts after the policies are settled.

A claimant who accepts a constructive total loss settlement surrenders title to the property to the insurance company.

Example of a Constructive Total Loss

Having insured property declared a constructive total loss is not always in the best interests of the insured parties, especially if they have failed to obtain coverage that is adequate to cover all contingencies.

Consider Derrick, who owns two new flatbed trailers, trailers A and B, which cost $25,000 and $30,000, respectively. Derrick decides to save money on his premiums by insuring his two trailers for only $15,000 each. He thought 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 trailer B. He thought that his coverage would be sufficient. The claims adjuster, however, determined that the accident constituted a constructive total loss on the two trailers and paid a $30,000 claim to Jeff.

When Coverage Is Inadequate

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. 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.

Still, Derrick was left with $40,000 to replace equipment that cost $55,000, even if the cost of flatbed trailers had remained the same. 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 their pre-loss condition, even in the case of a constructive total loss.