I was recently in a minor accident. One fender of my car was damaged; the rest is intact. Nevertheless, the estimate from the body shop was $4,500 and included the replacement of many parts that weren’t damaged. Now they’re saying my car might be a total loss. Why is insurance so eager to write off barely damaged vehicles? —Carless in Portland

As much as it pains my inner Reed College sophomore* to say it, the free market can be a wonderful thing. Operating solely on human greed (our planet’s most abundant resource), supply and demand reliably sets prices precisely where they belong. Go, capitalism!

Lest I sound like I’m trying to get invited to Vivek Ramaswamy’s next Davos after-party, however, let me add that there are plenty of situations where the laws of supply and demand break down. Your Chrysler just plowed into one.

This particular trap is known as the “third-party payer problem” and often crops up when someone is spending someone else’s money. With no skin in the game, the buyer has no particular incentive to negotiate a fair price. In your case, Carless, if it weren’t for the annoying prospect of losing the car entirely, your response to that inflated estimate would probably have been to shrug and go along. Sure, it’s a ripoff, but that’s the insurance company’s problem!

Multiply this by tens of millions and you have one reason why car insurance is so expensive. Claimants can have their car fixed wherever they like, and they’re under no obligation to drive a hard bargain. This incentivizes the shop to pad out the estimate with items that are, shall we say, in the outer penumbra of what’s necessary. Sure, that scratch would probably buff out, but don’t you deserve a whole new hood?

Insurance usually pays around 70–80% of a car’s value for a repair; estimates above that will result in a total. Hard figures are tough to come by, but anecdotally it sure seems like a lot of repair estimates come in around 65% of the car’s replacement cost, conveniently squeezing maximum cash from the insurer.

Sometimes, however, the stated figure is a bridge too far. The insurer balks, the vehicle is declared a total loss, and the shop gets nothing. The prospect of losing out in this way, it’s said, helps keep the shops honest. I’m not holding my breath, though.

*Don’t laugh—my time as a Reed sophomore was the best five years of my life!

Questions? Send them to dr.know@wweek.com.