Noun
to·tal loss | ˈtō-tᵊl ˈlȯs
Definition: The complete destruction of insured property, such that repair costs would exceed the limit of insurance coverage.
The fire caused a total loss to Joe and Becky’s house.
A total loss is when an object of insurance is damaged so badly that it can’t be repaired within the limits of the insurance policy. It means that the cost of repairing it would be too expensive, either because it exceeds the limit of the policy, or that it would be cheaper to simply replace the object.
People often say something was “totaled” when it suffered a total loss. It’s a term more frequently heard in the car insurance world, but homes can suffer total losses, too. A total loss of a car occurs when the cost of repairing a damaged car is higher than the car’s cash value. In this case, the insurer would offer the vehicle’s owner a cash settlement based on the value of the car, and take the totalled vehicle as salvage.
Each insurance provider has their own method for calculating the cash value of a car. Generally, they’ll come up with an average based on what similar vehicles in the area have been selling for. Comparing that with the estimated repair cost, they’ll decide whether to pay for repairs or to offer the owner a cash settlement.
The line between “totally destroyed” and “kind of destroyed” can be a little ambiguous, which isn’t helpful when you’re talking about contracts of insurance.
So, as with car insurance, the total loss of a house is defined pretty specifically: it’s when the cost to repair damage to the home is greater than the value the home is insured for.
There are two kinds of total loss: actual total loss, and constructive total loss.
Actual total loss to a home means it’s completely destroyed, and nothing of value or use remains.
Example
Following a wildfire that swept through the town, Ross’ house was burned to the ground. He had no choice but to have the debris cleared and build a completely new house. This was an actual total loss event.
Constructive total loss means the house is not totally destroyed, but the repair costs would still exceed the home’s insured value.
Example
A severe inland flood in Agnes’ neighbourhood left the ground floor and basement of her home completely destroyed. The water damage was so bad that the whole foundation and ground floor needed to be torn out and built anew. Even though the second floor of her house was unharmed, the repairs were so extensive that the cost exceeded her home’s insured value. This was a constructive total loss event.
Either type ends up the same for the homeowner: the insurance company will pay the full insured value of the home (as long as the cause of the destruction was something covered by the policy).
If the homeowner’s insurance policy includes guaranteed replacement cost, the home insurance company will pay the full cost of rebuilding the house, even if it’s more than the home’s insured value. Otherwise, the homeowner will be responsible for covering any shortfall between their insurance coverage and the actual cost of rebuilding their home.
In insurance, a total loss is where the insured property is damaged so severely that the cost to repair it is greater than the value it’s insured for.
When a car suffers an insured total loss, the insurer will pay the owner a cash settlement based on the vehicle’s value and take the destroyed vehicle as salvage.
When a home suffers a total loss, the insurance company covering it will pay to rebuild it up to the full insured value, and beyond that value if the homeowner had guaranteed building replacement cost coverage.
Total losses can be either actual or constructive.
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About the expert: Daniel Mirkovic
A co-founder of Square One with 25 years of experience in the insurance industry, Daniel was previously vice president of the insurance and travel divisions at the British Columbia Automobile Association. Daniel has a bachelor of commerce and a Master of Business Administration (MBA) from the Sauder School of Business at the University of British Columbia. He holds a Canadian Accredited Insurance Broker (CAIB) designation and a general insurance license level 3 in BC, Alberta, Saskatchewan, Manitoba and Ontario.
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