A Constructive Total Loss (CTL) is a loss in which the item insured is not totally destroyed but is so severely damaged that the insurance company considers it uneconomical to repair. The insured item will be totaled-out and the title surrendered to the insurance company. Often, a loss equal to 50 or 60 percent of the stated value of the item is considered a CTL. This means that it is important to accurately state the value of insured items to avoid taking a personal loss in a CTL situation.
Here’s an example of a possible CTL:
Jeff purchased two new flatbed trailers, a “lead” and a “pup,” which cost $40,000 and $45,000, respectively. He figured that he would be able to repair any damage to the trailers himself, so to save money on his premium, he insured the trailers for only $15,000 each.
Jeff then had an accident that caused $12,000 in damage to the lead and $9,500 in damage to the pup. He thought that his $15,000 in coverage would cover his costs to repair the trailers. The Claim Adjuster, however, determined that the accident constituted a Constructive Total Loss on the two trailers, and Jeff would receive $30,000 from the insurance company.
Jeff could have repaired his two trailers for $30,000, but because they were totaled-out, he had to surrender the titles of the trailers to the insurance company, meaning that he no longer owned the trailers and could not repair them. 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 Jeff’s claim and generate a profit of $10,000, which was given to Jeff.
Jeff was left with $40,000 to replace $85,000 in equipment. Had Jeff 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 pre-loss condition, even in the case of a CTL.
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