What is an Insurance Lienholder?
We get many questions from our readers asking us what an insurance lienholder is. Here is our explanation.
If you have purchased a vehicle and still owe money on it to the lien-holder (the bank, finance company, credit union, etc.), then the institution that you owe that money has as much of a financial interest in the vehicle as you do. This means that the institution you owe money to is a lienholder on the title to your vehicle; you do not truly own the vehicle until it is fully paid off. This is what gives the lien-holder the right to repossess your vehicle is you fail to meet your required monthly payment.
If the said vehicle were to be damaged, stolen, or found to be un-repairable, not only are your financial interests affected, but so is the lien-holder’s. This is why the lien-holder requires you to purchase insurance on the vehicle; to protect the financial interest of the both of you. You will be required to purchase both collision and comprehensive (other than collision) coverage.
If the vehicle sustains damage in an accident or other loss, a lien-holder will expect the vehicle to be repaired so that it does not lose value. Some people believe that they can save money on their insurance premium if they do not report minor covered damage to their insurance company. This might be true in the short term, but if the lien-holder were to find out that the vehicle has been damaged they may pursue the insurance claim regardless of your wishes. Even if the vehicle were to be repossessed, the lien-holder has the right to pursue an insurance claim against your policy for any damages to the repossessed vehicle. Either way, you would be responsible for the amount of your deductible.
Then the lien-holder has what is called an insurance lien. This means that if the vehicle is declared a total loss, the financer will be able to recover its money. Therefore, the insurance purchased must be adequate to cover the value of the vehicle. This is why your insurance company needs to know the year, make, model, options, and everything else they ask to know about the vehicle you are asking to insure. Then they can bill you for the proper value of your vehicle.
Also, keep in mind that in the event of a total loss, while your insurance lien-holder hopes that your insurance will cover the entire balance owed on the vehicle (just as you do), they will just pursue you for the difference if it does not. (This is why GAP insurance is such a particularly good idea.)
Most car dealerships in the United States will not let you take possession of a newly-purchased vehicle without proof of insurance because they have to answer to the lienholder also. You will also most likely find in your purchase agreement a clause stating that failure to maintain insurance on the vehicle will allow the financing company to step in and choose insurance for you at your expense. (It is hard to imagine that insurance lien-holder will care whether you get a great deal on that policy premium or not, so it is probably better to choose your own.) Whether you choose the insurance company or your lienholder chooses it, you are the one responsible for making those insurance payments.
The only way around having to purchase collision and comprehensive (other than collision) coverage on your vehicle is to have it paid off; therefore there is no lien-holder. Just be sure that if anything were to happen to the vehicle, you can either accept or handle the necessary repairs yourself or absorb the loss. Also, this idea applies only to first party coverages. You will still need to meet the minimum financial responsibility requirements (insurance laws) of the state or province you live in and carry liability insurance to protect those who may sustain personal injury or damage due to your negligence.
This article is written for informational purposes and is not intended to take the place of competent local legal counsel.
Other articles that may interest you:
Read Our Insurance Company Reviews
Ten Ways to Save on Your Automobile Insurance
An Explanation of Insurance GAP Coverage
Why Bother With Buying Automobile Insurance?
First Party Insurance Claims vs. Third Party Insurance Claims
The Insurance Company's Claims Process Explained
What to do When You Have Been Involved in an Accident
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