Auto Accident: Use of Insurance Proceeds

When an insurance company pays for repairs to a car, what happens if the owner of the car uses the money for something else?

The insurance company paying for the repairs to a damaged vehicle may write you a check or they may choose to pay the repair shop doing the repair work directly. If you have a preference as to how the funds are handled, you can always ask. However, the payment of claims depends largely on the policies of the insurance company you're dealing with.

When an insurance claim payment is made directly to the car owner, many car owners are tempted to use it to pay for something else, depending on the extent and type of damage the insurance proceeds are meant to repair. Sometimes owners will choose to put the money toward paying off their car or to use it as a down payment on a new one.

Of course, using the money for something other than the intended repair can come back to haunt you. If the damage is not fixed then it can reduce the amount of money you receive on a future claim. Your insurance company would take into account your vehicle's condition in determining the value of your vehicle on a subsequent claim. This can have two important consequences:

• The amount of money you will be paid for your totaled car will be less than what it would have been had the previous repairs been made.
• Instead of being able to have your car repaired and returned to you, the insurance company could declare it totaled and take it. How could this happen? When deciding how to respond to a claim insurance companies will pay the lesser of the actual cash value of a car or the amount it will take to repair it. If you have pre-existing damage to your car which lowers the actual cash value of it, it might be enough to make it cheaper for your insurance company to declare it totaled than to fix it.

Regardless of what you do with the money, be aware that if the car was not paid off, you still have to continue making payments on the car to the lender, even if the car is declared totaled. Check the contract that you signed when you purchased the car to see if there are any provisions the lender put in regarding repairs made to the car while there is a loan balance.

Like many things in life, it's a risk. The question is whether or not you want to take that risk. The best thing to do would be to use the money for what it was meant for - repairing the car. Even if you never have another accident with that car, it will have a higher value when you go to sell it or trade it in on a new vehicle.

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