12/2/2011 10:20 AM ET
The economy has dented your car's value, at least in the eyes of insurers. Here's why, despite fewer serious wrecks, more cars are being declared a total loss.
Yet we are totaling far more cars.
In 2000, about 9% of the cars appraised for repairs were judged totaled, says car insurance claims analyst CCC Information Services. In 2010, that number rose to 14%.
We're not having more wrecks. And we're not having worse wrecks.
We're having a recession.
"Totaled" to the average driver means a wreck with a "holy cow" amount of damage. But "totaled" to your car insurance company means simply that repairs to the car don't make financial sense. That decision hinges on the car's value, its age and the repair costs. The Great Recession has done a number on all three.
Why we're buying and insuring older carsIt all started with a recent, astronomical run-up in the price of used cars. In 2008, as the recession took hold, new-car sales plunged. Would-be buyers feared for their jobs and hung on to their old cars. Tighter credit meant many who wanted to take the plunge couldn't. And manufacturers could no longer raise the money needed to underwrite subsidized leases and rebates.
Here's what new-car sales looked like over the past five years, according to Automotive News:
- 16 million in 2007.
- 13 million in 2008.
- 10 million in 2009.
- 11.6 million in 2010.
- 12.2 million (estimated) this year.
Since the sales meltdown, the pool of like-new used cars has shrunk. Prices for those cream puffs have risen, pushing some buyers toward models with a few more miles. Those older cars now are selling at a premium, with sticker shock rippling all the way down to clunkers that can be bought without credit.
Last year alone, the Bureau of Labor Statistics says, the price of used cars rose 12.7%.
Cars are older, smaller -- but not cheaper to repairAs people keep their old cars longer and feel less inclined to buy new ones, the average age of autos on the road has risen by more than two years, from 8.5 years old in 1995 to 10.7 years old today, says Gotsch.
The cars are smaller as well. With the sudden rise of fuel prices in 2008 (and Cash for Clunkers removing 700,000 gas guzzlers from the roads), smaller, lighter, more fuel-efficient vehicles gained market share. Today, the roads carry a growing proportion of small vehicles that suffer more extensive damage in a wreck.
The impact of a crash pushes destruction farther back through a small car, involving a larger proportion of the body, says insurance analyst Greg Horn of Mitchell International. "The bottom line is that the smaller the car, the more likely it is to be totaled," says Horn.
With roads full of older, more vulnerable cars that still use expensive-to-repair technology such as air bags, the tipping point at which a car is declared a total loss happens at lower and lower values, the experts say. If used cars weren't fetching such high prices, the problem would be even worse.
"We have seen it go from upwards of 12% with some (insurance) carriers to, say, upward of 20% of the vehicles have been totaled," says Gotsch.
The math behind your totaled carTo a stranger or an insurance company, your beloved, ultraclean 10-year-old car isn't worth much. You're probably wondering whether to keep collision and comprehensive coverage on your car insurance policy.
But say you did. Your 2002 Nissan Altima in "good" condition is worth about $3,500 in trade, according to Kelley Blue Book. And say you absent-mindedly connect with a parking-lot light pole, cracking the bumper and headlight and wrinkling the hood.
The average claim last year on cars older than seven years was $1,913, CCCIS says. Let's use that number as your damage claim. If you have rental-car reimbursement coverage, your adjuster will add an estimate for that to the total. Then he looks at what kind of salvage value the car has if sold to a parts yard.
If the total for repairs -- plus rental, any storage fees and salvage value -- is more than the pre-crash value of the car, he'll probably take title to the car and write you a check.
If the estimate of repairs exceeds your state's threshold, he'll write you a check. About half the states set a threshold, ranging from Iowa's 50% of actual cash value to Texas' 100%.
If the car simply won't be safe, he'll write you a check.
CCCIS says one in four wrecked vehicles more than 7 years old winds up a total loss.