Explaining Salvage in Car Insurance Claim

India is a highly populated nation with a lot of traffic and vehicles on the road. Also, rash drivers who do not adhere to traffic laws are always the cause of accidents and even casualties. In some situations, these accidents are brave enough to cause total loss of vehicles and people's lives. Car insurance helps to protect you from financial losses in case your vehicle gets into a collision.

In this blog, we will discuss salvage value in car insurance, its calculation mechanism, how salvage value is different from total loss, and more.

In car insurance, salvage refers to a vehicle that has been declared a total loss by the insurance company. This typically happens when the cost to repair the vehicle after an accident or damage exceeds a significant portion (often 75% or more) of its Insured Declared Value (IDV) or current market value.

Once deemed a total loss, the insurer usually pays the policyholder the IDV of the car. The damaged vehicle then becomes the property of the insurance company, which may sell it to a salvage yard for parts or scrap to recoup some of its loss. The car receives a salvage title, indicating its severely damaged status.

There are many factors that influence the salvage value of a car. The following is a list to look into:

You must be wondering how salvage value is calculated in vehicle insurance and how the car’s valuation is done. Here are a few simple steps to calculate the salvage value of a car:

Step 1: Know The Estimated Cost of the Items

This step consists of calculating an estimated cost for the remaining items. It also includes the cost of repairs, installation, and de-installation, and other relevant costs until those items are ready for sale.

Step 2: Subtracting Depreciation

Insurance companies have set guidelines on the percentage of depreciation a car will undergo every year after purchase. Subtract the depreciation amount from that part’s estimated value.

Step 3: Determine The Utility of that Item

Experts in salvage yards examine these items and can make an estimate of their utility and how long they will work before they break down.

Step 4: Using The Formula

Lastly, a formula is applied as per the available estimated prices for salvage value calculation under car insurance. Here is a formula for the actual salvage value.

Salvage value = P(1-D)^n 

Or, 

Salvage value = P-(D*T)

Here,

P is the actual value for a remaining item.

N is the number of years that the vehicle was in use.

D represents the percentage of depreciation every year.

T is the number of years.

The following is a simplified breakdown of the claim settlement process for salvage cars:

If you surrender the car, the insurer pays you the IDV (Insured Declared Value) minus deductibles, and they take ownership.

If you retain the car, you receive the IDV minus deductibles and salvage value.

There are many factors that can influence you to decide whether you should keep your car or give it to your insurance company at a lower price. Some of those factors are repairability, magnitude of damage, availability of parts and cost of repairs and availability of insurance for the rebuilt car. However, driving a rebuilt car is risky and prone to system failure, so you should make your decisions carefully.