Constructive Total Loss in Motor Insurance

Your insurance policy document contains the terms and conditions of the contract between you and your insurance company.

Underwriters (insurance companies) incorporate clauses into insurance policies to limit their liability, protect them from undue exposures and from being taken advantage of. One of such clauses is Constructive Total Loss (CTL).

Do you have a motor insurance policy? If yes, then you need to know what this clause is about.

CTL is a standard motor insurance policy wording. No prudent underwriter would expunge it from your policy on you request, and it is rarely altered to suit a particular client. This invariably means that the best you can do is to understand the clause and how it is applied so that you are informed and prepared should there be need for it.

Before delving into what CTL is, an understanding of what Total Loss is, as it applies in motor insurance (MI), is necessary.

What is Total Loss in motor insurance?

Total Loss (TL) arises when your vehicle has been damaged beyond repair. Such damage could be a result of fire outbreak, collision, or an external impact that left the vehicle in a state to total wreck such that it becomes nearly impossible to embark on a repair journey without significantly altering the car.

Your insurance would pay you off and retrieve the remains of the vehicle as their salvage. Your motor insurance policy ceases to exist as liability on it would be deemed to have been fully discharged.

Got it! Now, tell me about Constructive Total Loss

CTL on the other hand is a clause which limits what you get from your motor insurance policy regardless of the extent of the damage to your vehicle.

It basically states that should the cost of repairing your vehicle be more than a certain (predetermined) percentage of its insured/declared value, the loss should be treated as a Total Loss (as explained in TL above). The applicable percentage is always stated in your MI policy.

Wow! Could you make it more practical?

Assuming the insured value of your car is N2,000,000.00 and the CTL clause in your MI policy is 65%, then the CTL value of your policy is N1,300,000.00 (which is 65% of N2,000,000.00). This means that should the cost of fixing your car exceed N1,300,000.00, this clause becomes operative. Your insurer would opt to pay you off and request that your surrender the vehicle to them. CTL serves as the maximum amount you could claim, on repair basis, from your MI policy.

This becomes a challenge where the value you insured your vehicle with is lesser than its actual or market value. Or where due to inflation, the amount you are offered in settlement becomes insufficient to repair your vehicle. Either way, you are left to bear the extra cost on your own should you desire to hold on to your vehicle.

Insurance companies uses this clause to protect themselves against the effect of Underinsurance. Read more about Underinsurance (here)

How do I, as an insured, protect myself from the application of this clause?

  1. Be informed. Always go through your MI policy to find out what the CTL clause states so you are aware.

It varies from one insurance company to another. And in some cases, from one policy to another though from same company.

Some underwriters graduate the CTL based on the age of your vehicle. The CTL in your policy could read; “70% of sum insured for vehicles lesser than 10 years from the date of manufacture, or 60% of sum insured for vehicles more than 10 years from the date of manufacture”.

2. Ensure that the sum insured (declared value) on your vehicle is adequate. Always ascertain that the value you are insured your vehicle for is the current market value. This reduces the effect of inflation on the cost of repairs to the barest minimum should it be warranted

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