Do you have to use insurance money for repairs?

You have to use the insurance money for repairs if you're still paying off the car loan. If you own the car, you can use the cash for other purposes, but it may affect your future car insurance rates.

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A former insurance producer, Laura understands that education is key when it comes to buying insurance. She has happily dedicated many hours to helping her clients understand how the insurance marketplace works so they can find the best car, home, and life insurance products for their needs.

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Joel Ohman is the CEO of a private equity backed digital media company. He is a CERTIFIED FINANCIAL PLANNER™, author, angel investor, and serial entrepreneur who loves creating new things, whether books or businesses. He has also previously served as the founder and resident CFP® of a national insurance agency, Real Time Health Quotes. He has an MBA from the University of South Florida. Jo...

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Reviewed by Joel Ohman
Founder & CFP®

UPDATED: Jan 19, 2021

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Here's what you need to know...

  • If you make payments on your vehicle, you must use the settlement money to repair damages
  • If you own your vehicle, you may be able to use the cash settlement for other purposes than car repair
  • Not repairing your damage with the insurance check will likely affect future claims

When you file an auto insurance claim for physical damage to your vehicle, the claims payout that is disbursed for you should be enough to reasonably pay for repairs to the damaged area.

The purpose of carrying physical damage coverage on your vehicle is to be able to recover from a loss without having to pay for a significant amount of the damage out-of-pocket.

While the claims payment would do this, not everyone is concerned with fixing dents and scrapes to their already aging vehicle.

If you are in the process of filing a claim, you might be wondering if you are obligated to fix the damages that the insurance company has issued a check to repair. After all, you can live with the dent in your fender and could use the money to cover other financial obligations.

Some drivers do choose to forgo auto damage repairs and cash the settlement check that they receive. If you fall into this category of claimant, read this guide and find out if forgoing repairs is in your interest.

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Questions You Must Ask To Determine Whether or Not to Repair the Damage

It is not always in your interests to forgo auto repairs so that you can hold on to the claims check. If you do not do your homework and you choose to cash the check without making repairs, it could end up hurting you later down the line.

You have to ask yourself a few questions before cashing the settlement check so that you do not violate your insurance or your lending contract. Here are the questions you should ask:

– Is the vehicle leased or financed?

There can be some complications when you have a loan on the vehicle or there is a lessor. If you do not hold the title and a lessor or lender does, you are required by the finance company to have the repairs done.

The lender/lessor is technically the owner of the car until the contract is paid off. The contract states that collateral must remain in good condition and it is the borrower’s responsibility to get it repaired in a timely fashion.

Failing to get needed repairs will violate the terms of your contract and can result in penalties.

You might assume that you can just take the check and cash it without the lender ever knowing the vehicle is damaged. Unfortunately for you, the lender requires that they are listed as the loss payee on the policy to protect their interests.

As a loss payee, their name will be on any claims check that is drafted. You must have the institution sign off on the check before it can be cashed. The loss will no longer be a secret. Since the lender will be notified of the damage, they will ensure that you have the repairs done.

– Do you own the vehicle outright and have a high deductible?

Owning the vehicle outright can make cashing a settlement much easier. Since you hold the title, you do not need an institution to sign off a check before you can get the money to put in your bank account or to pay the repair facility.

While the complications and delays that come with having a loss payee are not present, there might be issues surrounding your deductible:

  • Policyholders select high comprehensive and collision deductibles to keep their premiums as low as possible.When there is no need to file a damage claim, having a high deductible is smart.
  • Unfortunately, some people do not put aside the money that they are saving so they can cover their deductible if they ever do have to have their vehicle repaired.
  • This can pose a problem for claimants when they simply cannot afford to pay for their deductible so that all of the repairs can be made to their car.

If you have a $500 or $1000 deductible and the damages are not much higher than the deductible itself, paying for the damage may not be ideal. For policyholders who cannot cover the deductible or who do not mind the damage, cashing the settlement is possible.

– Does your insurer offer a direct payment option?

The claims process varies from insurer to insurer and from state to state. If you own your car outright and you just want to keep the cash, you should check to see if the company requires the check to be issued to a body shop.

Some insurance companies have written requirements built into the contract that state that repair checks must go to a partner body shop. The other companies will have a direct payment plan that allows the adjuster to issue the check direct to the named insured that you can cash.

– Would you like to keep physical damage coverage on your car in the future?

Physical damage consists of both comprehensive and collision coverage. Each of these coverage options will pay to repair or replace your vehicle up to the Actual Cash Value of the car when you suffer a covered loss.

If the car is damaged and you make a physical damage claim, the insurer expects you to repair the car if you want to keep the physical damage cover.

It is standard procedure to require policyholders who do not repair their covered auto to remove comprehensive and collision from the policy. To prove that the repairs were made, they will ask for invoices from the body shop or may ask for photo evidence.

In some cases, insurers will require you to remove both coverage options even if repairs were made because airbags were activated or the frame was damaged.

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What happens if you do not do repairs and you have another loss?

Insurance companies document claims and keep these files for the future. If you have damages that are not repaired, these damages will be considered pre-existing in a future loss.

The insurance adjuster will calculate the cost of the damages and subtract the cost of the prior damage when paying claims for issues in the same area. Do not be surprised if your claims payment is low when you have failed to have repairs made in the past.

The answer to the question regarding whether or not you must repair your car with insurance money is maybe.

If you do not like your insurer’s claims procedures, it might be time to shop around. Start comparing car insurance rates by using our FREE tool below to really find the best rates, and you can choose the best insurance with the best pricing.


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