Use of Car Insurance Proceeds After an Accident

Can you use the insurance company's payment for something other than getting your car fixed?

When your vehicle is damaged in an accident, your car insurance company will usually require you to obtain an estimate of the repair costs (the company may take the lead in getting one or more repair estimates). Once an estimate is received, the insurance company will either write a check directly to you, or make the check out to the shop that performs the repair work. So, can you do whatever you want with this money, or do you have to use it to get your car fixed? The answer usually depends on who actually owns the car. But even when you're free to use insurance proceeds elsewhere, that doesn't mean it's always a good idea. Read on to learn more.

Who Owns the Vehicle -- You, the Dealership, or the Bank?

If you are financing or leasing your vehicle, the insurance company will write the check to the repair shop because it will want to protect the lender's interest in the vehicle; in this situation, you will have no choice about what to do with the insurance proceeds because they will never come directly into your possession.

However, if you own the vehicle outright, you may well have the choice of having your insurance company pay the repair cost directly to you. When this occurs, you may wonder whether you are obligated to use the insurance proceeds to repair the vehicle, or whether you are free to use these funds for some other purpose.

Learn more about vehicle repairs and car insurance claims.

Think Before You Spend

So, let's assume you own the vehicle that was damaged in an accident. Unless your insurance policy contains language that contractually obligates you to use the proceeds of an accident claim for repairs to your damaged vehicle, you are free to use this money for any lawful purpose of your choosing. But before deciding to spend this money on something other than repairing your vehicle, you should seriously consider the reasons why this decision might be unwise.

First, you have been paying insurance premiums for the purpose of having coverage for exactly this type of situation. Second, using the claim proceeds to repair the vehicle will maintain the vehicle's market value and increase its resale or trade-in value when you want to replace it with a new vehicle. And third, depending on the nature and extent of the vehicle's damage, failure to perform repair work in a timely manner may lead to further damage to the vehicle down the road, which will cost much more money to repair, and this additional damage will not be covered by your insurance.

Some people are not overly concerned about driving a vehicle with a few dents and dings, and would rather pocket the insurance proceeds than spend the money on repairs. This is particularly true in the case of older vehicles that have limited resale or trade-in value. But, if your vehicle is fairly new, chances are that the damage from an accident will significantly affect the vehicle's value and may also affect its performance.

"Total Loss" Declarations are Different

The above discussion assumes that you are contemplating a decision to take the insurance proceeds from an accident claim and use them for purposes unrelated to fixing the vehicle's damage, while continuing to own and operate the vehicle in its damaged condition. If, however, your insurance company declares your vehicle to be a "total loss" (i.e., your insurer "totals" your vehicle) and offers to pay you an amount representing the vehicle's fair market value, you won't be able to take the money and keep the vehicle, even if it is still operable. Instead, your insurance company will require you to turn the vehicle in as a condition of receiving the claim proceeds.

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