Total losses
There is a total loss when a vehicle has been damaged beyond
economic repair (i.e. when the estimated cost or repairing
the damage is not much less than, or is equivalent to, the
market value of the vehicle).
There may be some difficulty in agreeing settlement on the
basis of market value at the time of the loss, but this basis
must be observed as far as possible (except for agreed value
policies) in order to comply with the principle of indemnity.
An indemnity is the cost of replacing the vehicle with one
of similar year, model and condition. It is important to appreciate
that it is the policyholder’s right to receive replacement
cost and not the price he would have received from a private
sale or from the motor trade.
Glass’s
Guide, a monthly publication containing average car prices
fro the preceding month, is usually used as an initial indicator
of value. Such factors as mileage, condition and additional
accessories fitted would be taken into account when negotiating
a settlement which could be more or less than Glass’s
figure.
Problems sometimes arise when a vehicle is in a particularly
good condition or is a special type.
Unfortunately market value seldom accurately reflects low
mileage, single ownership, or the money and care lavishing
on good maintenance and additional accessories and refinements.
The insured may feel that the car is virtually irreplaceable
and press strongly for repairs to be carried out, even though
the cost may be uneconomic.
In such cases insurers are generally sympathetic and if a
reasonable compromise cannot be reached will sometimes agree
to repairs being done subject to the insured making a contribution
towards the cost.
It is inevitable that from time to time disputes will arise
which may have to be resolved by arbitration.
Constructive Total Losses
A constructive total loss arises when the probable cost of
repairs exceeds the market value of the vehicle or the policyholder’s
estimate of value, whichever is the less.
Insurers then pay for an actual total loss. In Darbishire
v Warran (1963), which concerned a 1951 Lea Francis, it was
held that the owner of an old car cannot expect to have it
repaired automatically at a cost greater than its market value
unless the car is unique and irreplaceable, and that where
the car is readily replaceable the measure of damage is the
market value.
In other instances of serious damage the insurer’s engineer
may recommend repairs, but frequently the policyholder refuses
to agree and presses for a cash payment. Often the insurers
agree to the policyholder’s request and then dispose
of the salvage. Alternatively the policyholder may arrange
with the repairer to accept the repaired vehicle in whole
or part exchange for another vehicle immediately and avoid
incurring loss of use costs.
Right to Salvage
The insurer’s right to salvage arises only where the
claim payment provides the policyholder with a complete indemnity.
In all other circumstances disposal of the salvage is a matter
for negotiation.
Insurers usually will have no qualms about taking over the
wreckage of a vehicle in order to dispose of is as salvage.
Whilst the insurers are taking over the responsibility for
the vehicle (a responsibility which can be onerous since the
insurers must take every step to prevent the wreckage from
becoming a danger or nuisance to the public), they are also
acquiring the opportunity to make the maximum possible use
of the salvage; most insurers have arrangements for the sale
of salvage to dealers or breaker’s yards and will probably
be able to obtain more for the wreckage than the insured could
independently. The proceeds which the insurers receive from
the sale will be set against the cost of the claim paid to
the policyholder.
Salvage
In 1967 the motor insurance industry as a whole entered into
an agreement with the Department of the Environment whereby
the licensing authorities were informed of ‘insurance
write-offs’ and the log books in respect of the destroyed
vehicles were returned by insurers to the authorities for
cancellation. (The latter was a step designed to prevent the
log books falling into the hands of car thieves who might
subsequently use the log books on stolen cars, a practise
known as ‘ringing’). The effect of the arrangement
upon the sums obtained by insurers by the sale of vehicle
salvage became immediately apparent: in effect, the sums offered
by breakers and scrap merchants for this salvage separated
into two levels – the lower amounts applied where the
vehicle’s log book was to be marked to show that the
vehicle had been written off, whilst the higher amounts applied
where the log book was not so marked. Insurers were faced
with the dilemma of weighing the public interest against their
own private interests: they could obtain much more for a particular
item of salvage if the log book were not marked ‘write-off’,
but there was a risk that a badly-damaged vehicle would be
rebuilt and returned to the road in an unsafe condition. Without
doubt and almost certainly without exception, the industry
put the public interest first and ensured that log books were
returned to the authorities suitably marked, but the 1967
agreement ran into difficulties nonetheless; one of the major
problems was how to get several hundred motor insurers to
apply precisely the same standard in judging whether a particular
vehicle was ‘seriously damaged’.
In 1971 the Department of the Environment terminated the arrangement
and since then attention has been focused from time to time
on the problem as to whether insurers should be required compulsorily
to notify the authorities of any vehicle in respect of which
a total loss settlement has been paid, regardless of whether
or not the log book has been marked. However, the Department
of the Environment and the Association of British Insurance
did not consider that the problem is serious enough to warrant
special regulations and is not nearly as serious as the problem
of the large number of vehicles which are put on the road
in an unsafe condition through lack of adequate maintenance.
More recently with the establishment of the
Claims Underwriting Exchange aka CUE where all car insurance
claim data is pooled, and recent iniitiatives such as the
Motor Insurance Database and Car Data history checks online,
the problem has reduced.
The policyholder’s impression of
the damage suffered by a vehicle may be based largely upon
examination of the vehicle before stripping. The removal of
badly damaged superficial parts, which may have absorbed much
of the impact, frequently indicates that the damage is not
as bad as might have been feared. The opposite can also, of
course, prove to be the case: the removal of damaged superficial
parts may reveal hitherto hidden and serious damage to the
vehicle’s chassis or other vital parts, and the cost
of repairing the overall damage might be much higher than
was originally anticipated.
Where an engineer is employed his report should be made after
the vehicle has been stripped, thus enabling him to give a
reliable estimate of the cost.
Agreed value car insurance policies
The effect of an agreed-value policy should be appreciated;
under such a policy the measure of indemnity is agreed in
advance, that is to say at the inception date or renewal date
of the policy, rather than at the time of the loss and the
principle of indemnity cannot, in consequence, be said to
have been breached.
It should be emphasised, however, that settlement of a claim
under such a policy is made on the basis of the ‘agreed
value’ only when the insured vehicle is a total loss;
if the vehicle is being repaired and the insurers are dealing
with a claim for those repairs, settlement will be concluded
on the usual basis, i.e. subject to inspection and approval
by the insurer’s engineer/assessor, etc.
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