When a Vehicle is a Total Loss: Understanding Endorsement No. 43
Why is an insured whose vehicle is a total loss due to an accident (or the vehicle has been stolen), and who has the Endorsement No. 43 and option 43 E*, receive an indemnity that doesn’t cover the total cost of a replacement vehicle?
Here are two possible reasons:
1. The dealer’s price includes credit charges**. Endorsement 43 does not cover these charges.
2. The insured borrowed money to pay for the damaged vehicle, and he is still paying off the loan.
To make things clearer, let’s look at the details.
Endorsement 43 does not cover credit charges when the insured purchases a replacement vehicle
Let’s say the price advertised by the dealer is $25,000, but the real value of the replacement vehicle is $22,000. The insurance company will cover only the real value of the vehicle.
Here’s an example:
- Real value of the vehicle : $22,000
- The dealer offers the following choices:
- a) $25,000 at 0% interest
- b) $22,000 cash down (a $3,000 rebate)
Although the interest rate is 0%, the vehicle is sold at a price higher than its real value ($22,000). The $3,000 difference is a credit charge, and these charges are not covered by Endorsement 43.
Regardless of how this purchase is financed, the insurer will pay only the real value of the vehicle ($22,000 in this example). Under any other system, people who chose 0% dealer financing would receive a greater indemnity ($25,000) than people who paid cash ($22,000), which would be unfair.
The insurer will first pay off the money the insured still owe for the damaged vehicle If the insured borrowed money from a financial institution or a dealer to buy the damaged vehicle, and he is still paying off the loan, money from the insurer must first be used to pay off this debt. To know if this is the case, the insured can check his loan contract.
Here’s how loan repayment works in practice:
1. The insurer will send the insured a cheque made out to him and to the bank or dealer. The insured is required to endorse the cheque.
2. The bank or dealer will deposit the cheque and take part of the money to pay off the loan in full. The remaining amount will be made over to him, and he can use it to purchase a replacement vehicle.
Because the loan has been paid off, the money the insured receives will not be enough to cover the total cost of a replacement vehicle. He will have to make up the difference, either by using money he has saved, or by taking out another loan.
Here are two examples that will help you understand the process.
Examples:
1. Total loss vehicle on which a $10,000 remains
2. Purchase of the replacement vehicle:
- Real value of the vehicle
- The dealer offers the following choices:
- a) $25,000 at 0% interest
- b) $22,000 cash down (a $3,000 rebate)
3. The insurance company pays an indemnity:The insurer pays $22,000 (which is the real value of the vehicle).
This is how the indemnity is spent:
- $10,000 is used to pay off the loan on the vehicle that is a total loss
- $12,000 is given to the dealer to cover part of the cost of a new vehicle
If the insured choose a 0% dealer financing:
To purchase a vehicle for $25,000, the insured must pay the dealer an additional $13,000. This includes a $3,000 credit charge.
If the insured choose an alternative to dealer financing for the purchase of his vehicle:
He must pay an additional $10,000 to purchase the vehicle. If he takes out a bank loan at 6% interest over three years, he will pay a total of $22,951.92 for the vehicle. The credit charge to pay will be $951.92 (instead of $3,000 with 0% financing).
* This endorsement says that the insured is entitled to an indemnity equal to the value of a replacement vehicle, new or used, that has the same characteristics, equipment, and accessories as the vehicle that is a total loss.** Information (in French) from the Office de la protection du consommateur