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When I was home from college one summer, my neighbor across the street backed into my car that was parked on the road. She did about a thousand dollars worth of damage and didn't want to go through insurance, so she wrote me a check. As a broke college student with an old beater, I needed the money more than my car needed the dents out, so I kept it.
But what would have happened if that check had come from an insurance company instead of my neighbor with the poor driving record?
Sometimes, insurers don't pay a body shop directly for fixes and will send you the check instead. If this happens and you get a car insurance payout, you should understand who has a right to that money and what you can do with it.
Key takeaways
- After a covered incident, a car insurance company should pay for repairs to the vehicle.
- If a car insurer doesn't pay the body shop directly, the car insurer will send a check, but it may be payable to you and your lienholder or lease provider.
- If you own the car free and clear, the payment should come right to you alone, and you don't necessarily have to use it for repairs.
How car insurance claim checks work
To understand how a car insurance payout works, you should review the car insurance claim process. If your vehicle is damaged in a way that auto insurance covers, such as hail damage or a crash, you can make a claim with your auto insurance company or with the at-fault driver's insurer.
When you make a claim, an insurance adjuster will assess the damage. If the damage is too severe and costly to fix, your insurer will "total" the car and pay you the fair market value rather than pay to repair it. You'll typically get an insurance check for the totaled vehicle, although if you have a loan or were leasing, the money may go to the financing company or lease provider.
If the car isn't totaled, the insurance adjuster will estimate the cost of repairs. The insurance company may pay a repair shop directly for the fixes, especially if the insurer already has a relationship with the collision shop. However, the insurer may instead send the check directly to you to use to repair your vehicle.
If you're the owner of the car with no loan on it, the insurer will make the payment out to you alone. If you have a loan or are leasing the car, though, the check may have your name and the name of the lienholder (the lender) or lessor (the leasing company). If the check has both your name and the name of the lienholder or lessor, you must make repairs before the check is signed over.
Lienholders and lessors have an ownership interest in the car and want to ensure you get the repairs. Plus, with a lease, you're just renting the car and won't own it in the end unless you buy it out. You may also have to meet strict requirements for the repair, including making sure the repair shop only uses OEM parts.
Check the terms of your loan or lease agreement to find out the details.
Can you keep the money rather than repair the car?
If you get a car insurance check for a repair, you might decide you'd rather have the money than a repaired car. This is what I did. However, your ability to just keep the cash is going to depend on several factors. Here's what you need to know.
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When you own the car outright
If you own the car outright, you typically don't have any obligation to use a car insurance payout to make repairs. The insurer has done their part and paid you, and you have more flexibility since there's no one else with a legal interest in the car. If you prefer to use the funds elsewhere, you can do so.
When you have a car loan or lease
When you have a car loan or a car lease, you are not the only one with a legal interest in the car. If you're leasing, you have to return the vehicle or buy out the lease when the lease term ends. If you financed the car, you have a secured loan with your car acting as collateral. If you stop making payments, the lender can take the car and sell it.
Because lienholders and lessors have this legal interest in the car, they want to make sure you properly repair it after damage. Car insurers know there are multiple parties with an ownership stake, so they may send the check to all those parties to allow the lender or leasing company to protect their interest too.
If your check is made out to you and your lessor or lienholder, you can't just spend the money. You must comply with the lienholder or lessor's requirements to prove the completed repairs. Only after that will they sign the check over to get the payment.
Unfortunately, even if the check does come to you alone, the terms of your loan or lease likely require you to make prompt repairs. If your car is leased, you'll also need to read your paperwork carefully to find out if there are specific requirements for how to make repairs.
Now, there are some (but not many) cases where you actually get a check from an insurance company for more than the cost of repairs. If that's the case, you'll likely get to keep the difference. However, some experts recommend notifying your insurance company in case their policy is that you must return the funds if there's no legitimate reason for the overpayment.
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State rules and insurance policy terms
States regulate many aspects of the car insurance claims process. For instance, most require prompt acknowledgment of a legitimate claim and a speedy payout.
California is one example. In that state, insurers must acknowledge a claim and start an investigation within 15 days of receiving notice. Insurers also must accept or deny the claim no later than 40 days after receiving proof. After accepting the claim, the insurer has to pay immediately and no later than 30 days after an agreement on the payment is reached.
Individual states set their own timelines. State laws also vary on whether the insurer must write a check to you alone or to other potential leaseholders/lienholders. You can visit the website of your state's Department of Insurance to find out the rules.
You should also check your policy terms to see if the contract with your insurer requires paying body shops directly for repair costs, in which case, you'd have no option to redirect the funds.
Risks of not using funds for car repairs
When you get a big check from an insurer, it's so tempting to just spend it on whatever you'd like. However, the insurer provided the money for a reason — to fix your mode of transport — and you need to carefully understand the risks of not making the repairs. Some risks include:
- Potential claims of insurance fraud: If you own the car outright, it's not fraud to keep money that the insurer sent you for repairs and not make them, as long as you didn't lie about the damage to get the check. However, if you take the money, don't make repairs, and file another claim later to try to get the insurer to cover the fix, that would be fraud.
- Problems with future claims: If you need to make a future claim and don't want to commit insurance fraud by asking an insurer to pay for the damage you declined to repair, your future claims will become more complicated. You'll have to figure out what portion of the damage was caused by the new incident that you're entitled to compensation for versus the old incident that you aren't.
- Difficulty renewing coverage: Some insurers don't want to renew your auto coverage after an accident, or they'll charge higher rates if they do. If you know you aren't going to pay to repair your car anyway, you may want to avoid making a claim in the first place to avoid such consequences.
- A lower resale value of your vehicle: If your car has unrepaired damage, you aren't going to get as much money when you sell it or trade it in. So, you're getting a windfall by keeping the repair check, but you pay for it later in the form of a lower sales price.
- Failed car inspection: Most states require you to get your car inspected. If the damage affected any mechanical operations, you might not pass inspection if you don't get the issues fixed.
- Vehicle safety issues: Finally, if you fail to fix issues that affect the safety of your car, you could put yourself and your passengers at risk.
You should seriously consider these major risks before you decide to keep a car insurance payout for repair instead of spending it.
When taking a car insurance payout can make sense
Although there are downsides to not fixing your car with funds earmarked for repairs, there are situations when taking the money and not fixing the vehicle makes good sense.
This included my situation, where the car was old and the damage was cosmetic. If your old vehicle has very little value anyway and the damage doesn't affect operability, it may be silly to spend a lot of money making cosmetic fixes.
Say, for example, you're driving your mom's old minivan from 2012 and you swerve to avoid a squirrel. You scratch the side of the car on a mailbox pretty badly, so the car needs $2,000 in cosmetic repairs.
If the insurer sends you a check for $2,000, you and your mom probably don't care a whole lot about the aesthetics of the car, so you may decide you'd rather keep the money instead.
FAQs
Can I just keep the money from an insurance claim?
Depending on the circumstances, you may be able to keep the money from an insurance claim. This is possible if you're the sole owner of the car and the insurer sends you a check to either replace a totaled car when you no longer need a vehicle or to make repairs you think are unnecessary.
If your car is leased or financed, though, the check might list your lienholder or lessor. You'd need to make the repairs or pay them what you owe before you receive any remaining funds.
What happens if you don't use car insurance money for repairs?
The consequences of not using car insurance money for repairs can vary depending on the situation. If you have a loan or lease, your lienholder or leasing company usually requires you to make the repairs. If you own the car outright, you don't have to fix it, but you could see a reduction in future resale value and risk safety issues or a failed inspection.
What if an insurance check is for more than repairs?
If your insurance check is for more than the amount of repairs, you'll usually be able to keep the difference. However, check your policy terms and conditions to see if there are any requirements for returning extra funds paid out without justification.
Bottom line
If you receive a car insurance payout for repairs, think carefully about what to do with it. If you're the car's only owner, the repairs are just cosmetic, the car isn't worth much, or you aren't worried about resale value, then just keeping the money may make good sense.
If you know you're going to do that, though, you may want to just avoid making a claim at all. Claims increase your cost while an accident-free history will lower your car insurance cost. Paying added premiums for years because you made a claim may not be worth whatever money the insurer is willing to pay for repairs you don't think are needed.
Of course, the best car insurance companies offer coverage at a fair price regardless of your record. To find the right coverage you can trust, you should shop around, compare rates, and check each insurer's reputation for effectively handling claims.
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