Salvage titles exist because it is obviously profitable for someone to buy totaled cars and rebuild them. But this even existing would imply that in some cases, an insurance company paid out more than the actual cost to repair the vehicle, because otherwise it couldn’t possibly be profitable.
For example, let’s say a car has a value of $30k and gets totaled. The insurance pays the owner $30k and sells the wrecked car to a rebuilder for $1k, so they are out $29k. If the rebuilder then spends $15k repairing the car and sells it for $20k due to its reduced value, they will make a $4k profit.
Thus, why wouldn’t it be better for the insurance company to just spend the $15k themselves to repair the car, write the owner a check for $10k for diminished value, and pocket the $4k while also avoiding whatever overhead it takes to do the transaction to sell the wreck? In addition, one would imagine that insurance companies could achieve much better scale and/or vertical integration by moving this operation in-house vs. small rebuilders.
In: Economics
This has a lot to do with how insurance companies work. Right off the bat they can’t really repair the example car for 15k unless they have their own auto shop to do it, and the overhead on that is enough to eat up the 4k of supposed profit they could make. So they don’t bother at all. Also when they’re paying for a claim they have to pay for the vehicle to be restored to an as new condition, which means every part that has been affected has to be replaced by a new one. There’s some leeway there, that can be negotiated between the repair shop and the client in case where using new parts may end up totaling the car in terms of cost, but from the insurance company’s side they have an obligation to pay for this level of repairs.
From the repair shop’s perspective though, there is a small profit margin on salvaged cars because repairs cost less to them than it costs to a customer or an insurance company, because they’re not expected to be paid with an hourly rate but with a lump sum from the sale. They already have the means and personell to carry out the repairs. Also when reselling a repaired vehicle, they don’t have to necessarily return it to the condition it was in before. They can use used parts, they will repair functional and mechanical faults but probably won’t bother with minor damage or aesthetic damage save for a cheap repair of a partial repaint and the like. They won’t care if the rims are scuffed or something like that. To them what matters is only that the cost of repairs in parts doesn’t exceed the profit they can make from selling it. They’re not truly losing money on the work hours either since the techs will be there either way and they can accomodate the repairs for salvaged cars according to their usual workload.
Basically it’s like any other product, where the price for the product increases from the factory to the shop window. If you can skip links in the supply chain, and then sell at the retail level, you can make profit. In this case the repair shop buys parts cheaper than retail customers do, and they obviously won’t charge themselves for their own work hours, so they can repair a car cheaper than a private owner could and then sell it for a similar price that the used car would go for. But it takes a keen eye in order to do this job. You have to know right off the bat what the parts costs will be and that it won’t take an unreasonable amount of time that would have been better off spent on paying customers.
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