Question: I recently had one of my vehicles repossessed. The car had some damage from when I bumped into a pole a few months back. Now my auto insurer informed me that a claim was submitted from the lien holder for the damage. I’ve been told that I will have to pay the deductible and then higher rates for the next three years due to this claim. Is all of this legal?
Answer: Yes, it’s legal. Your lien holder is allowed to file a claim, you can be required to pay the associated deductible, and your insurance company can raise your rates due to the claim.
Let me explain what happened here.
You damaged your financed vehicle and did nothing about it. As you should be aware from your auto finance paperwork, your lien holder expected you to keep the car, its asset, in good condition until you paid off the loan in full. This is one reason that lien holders require people who finance to carry physical damage coverages of collision and comprehensive as part of their car insurance policies.
- Collision insurance covers the vehicle for damages sustained when the vehicle hits, or is hit by, another vehicle or object – like a pole.
- Comprehensive covers the vehicle for situations that are “other than collision,” such as hail, fire, vandalism and theft.
Surely you would have filed an insurance claim for the total loss of your vehicle if it were totaled out. However, you neglected to make a claim for the apparently minor damage you caused.
This wouldn’t be a big deal if you’d taken care of the damage by paying for repairs out-of-pocket or kept the car until it was paid off. Instead, though, the car damage remained and you got behind in your car loan payments – then the vehicle was repossessed.
Bank can make a claim because it owns the car
Once the vehicle was in the custody of your lien holder, it saw the damage and realized the vehicle’s value was lower because of it. This reduces what the lien holder could receive at auction for the car, which is what normally happens to repossessed vehicles that aren't reclaimed.
When you financed your vehicle, your lien holder should have required you to list itself as such on your car insurance policy as well as a loss payee. Being placed on your auto policy this way allows the lien holder to make a claim for damage to the vehicle now that the car is in its possession.
Even though you aren’t making the claim, you should have when it was damaged, paying the deductible at that time. Thus, this is why you’re being told you’re responsible for the deductible amount of this collision claim. If you don’t pay the deductible, it’s possible the lien holder will, and then tack it onto what you already owe it.
In the end, it appears your car insurance company is accepting the claim and due to this claim (or perhaps not this exact claim but the total amount of claims you’ve now had in recent years with your auto insurer) your car insurance premium will go up.
If your car insurance provider mentioned this would affect your rates for three years, it means that according to its rating system you’ll receive a surcharge for that length of time. A surcharge is an extra charge added to your rates that increases your overall premium.
How much the surcharge will be depends upon your specific company’s surcharge schedule. It may be as little as 10 percent or up to 40 percent or more -- it varies greatly from one insurer to the next.
Rating systems and surcharges are approved by state insurance regulators, so this is indeed a legal practice.
Since car insurance company guidelines and rates do differ so much, it’s important for you to compare car insurance rates and find the company with the premiums that are most affordable to you. You may be able to save hundreds of dollars with an insurance company that doesn’t surcharge for this claim, or at least not as much.