Question: Is an insurance company required to notify the lienholder before issuing a check for repairs or total loss?
Answer: You may pay the car insurance premiums, but your car is still collateral for the lienholder until you pay off the loan. This requires the lender to be kept in the loop about first-party physical damage claims and settlements of any kind – including the issuance of a check. However, if it’s a third-party claim check, then your lender may not be as well-informed.
First-party claim check
Your finance paperwork for your vehicle will mandate that your lienholder be listed as such on your car insurance policy as well as a loss payee.
This means a lienholder will indeed be notified about any car insurance claim settlement checks that come from your own car insurance company (a first-party claim). It also means that the lender’s name will be on the check along with your name. An exception can be if the check is made out directly to the repair shop.
When a check comes to you and is made out to both you and the lienholder, you’ll have to contact the lender to discuss how to get the checked signed over to take care of the repair bill.
Typically, the check will be endorsed by the lender only after you provide documentation showing that the vehicle was repaired. Then the lienholder may:
- Sign the check and send it directly to the repair shop, or
- Endorse the check and let you deposit into your bank account. This allows you to write the check to the repair shop.
Either way, you’ll still owe your deductible (the amount you must personally pay before your insurance policy benefits kick in) to the repair shop.
Since this type of check endorsement is common practice, your lienholder should have well-established procedures in place if you contact its customer service department.
If your car is a total loss, then the check for your vehicle’s actual cash value (minus your deductible amount) may be written to you and your lender. In this situation you’d sign the check over the lender to pay off your loan amount.
If the check just covers the loan, then you won’t get any money back. If the check is over the loan amount, then the lender would return the extra to you. Or, your car insurance company might make out two checks, one to the lender for the loan amount and a second to you for the remainder of the settlement amount.
If your vehicle is worth less than the loan amount, then the whole check would go to your lienholder. You’d be responsible for any loan amount still left -- unless you have gap insurance to cover this amount.
If instead you have an at-fault driver's insurance company writing the check for repairs (a third-party claim), then it’s possible that your lienholder won’t be involved.
Your own car insurance company has an obligation to inform your lender because it’s aware of the lienholder as a loss payee. A third-party insurance company doesn’t have a contract with you and doesn’t have this information.
However, this doesn’t mean that you can take a third-party check and not repair your vehicle.
Typically, finance contracts are quite clear that you are required to take any such insurance check and use it for the repair of your vehicle. If your lender catches wind that you took an insurance settlement and did something other than pay for repairs for the financed vehicle, it can get upset and mandate that you fix the vehicle.
If the car is a total loss and a check is written for its actual cash value, then the third-party insurance company is likely to dig deeper and check on who holds the title to the vehicle. If it finds you have a lienholder, then it should write the check out to both you and your lienholder to avoid any legal issues that could arise if the check isn't done this way.
The only time you really can do whatever you want with a car insurance settlement check is when you own a vehicle outright. This makes it important to update information with your auto insurer if you pay off your loan during your policy period.
Once you no longer have a lienholder to answer to, you’ll be able to fix the car or pocket claim money. Just don’t expect an insurance company to pay for the same damage twice. (See “Do you have to fix your car?”)