As experienced personal injury attorneys, we see it all the time. A person buys a new or used car on credit, and then totals the vehicle in an accident that wasn’t even that person’s fault. Most folks think that in that situation, they have nothing to worry about because “that’s why you have insurance, right?” Well, not so fast. Whether or not you are on the hook for a significant amount of money in these situations can depend on the answer to these questions:
- What type of automobile insurance coverage do you have?
- Does the at-fault driver have automobile insurance coverage?
- How much do you owe on your vehicle? vs. How much is the vehicle is worth?
- Do you have sufficient “Gap” coverage? (Note: This blog entry solely focuses on property damage and does not discuss injury or medical coverage issues).
1) What type of automobile insurance coverage do you have?
Typically, we think of this question in terms of “liability” insurance coverage vs. “collision” insurance coverage. “Liability” insurance coverage means that you are only covered for the damage you caused to someone else’s property in an automobile accident where you were at fault. “Liability” coverage is essentially the basic minimum type of insurance coverage that is required for virtually all private citizen drivers. Oftentimes, the problem with this type of coverage is that if you are hit by an at-fault driver who has no insurance, then your property damage is not covered by your insurance policy and you will likely have to pay for everything out of pocket. This is why in most situations where you are financing a vehicle, the financing institution won’t allow you to only have “liability” coverage.
“Collision” insurance coverage on the other hand, means that your property damage is covered even if you were the at-fault driver in an accident, or the other driver is the at-fault driver and has no insurance coverage. Usually, you still have to pay your deductible, depending on the facts, but the remainder of the value of your vehicle will be covered. Drivers who have “collision” coverage also have “liability” coverage.
When thinking about the type of automobile insurance coverage you have, you should also consider what the proper amount of insurance coverage should be for your specific situation. Each state has minimum requirements for the amount of automobile insurance coverage for the different types of coverage (property, bodily injury, etc), so you have to have at least that minimum amount to comply with state law. It is important to remember that the insurance company is usually only on the hook for the amount of the policy limits. Therefore, if an at-fault driver does $60,000 worth of property damage to another person’s car, but only has $50,000 in property damage coverage, then the at-fault driver may be personally liable for the $10,000 not covered by his or her policy.
2) Does the at-fault driver have automobile insurance coverage?
If you only have “liability” insurance coverage and you are driving your car and get into an automobile accident with a person who was “at-fault”, and that person has no insurance coverage, then you are probably out of luck with regards to your property damage. Sometimes we get asked by people in this situation: “Why can’t I sue the at-fault driver for my property damages?” The answer is usually: “You can, but you aren’t likely to get your money back.” There are many reasons for this. First, if the at-fault driver wasn’t able to afford to pay for minimum insurance coverage, chances are they probably don’t have any money to pay you when you win your lawsuit against them. Second, your damages in such a lawsuit are mostly limited to the value of your property damage. In other words, you cannot make the at-fault driver pay your attorneys fees or court costs in most cases, so those amounts would have to come out of the property damage award. Finally, any judgment you get in court against the negligent driver can likely be discharged in bankruptcy just like most other debt. So it is possible that by suing the at-fault uninsured driver, you actually end up losing even more money in court costs and attorneys’ fees, if that person discharges his debt to you in bankruptcy.
For these reasons, most financing institutions require you to at least have “collision” insurance coverage on the automobile you financed with them. If you have collision coverage on your automobile and your car is damaged by a negligent driver in an automobile accident, then you can file a claim on your own insurance and be covered for the value of your car, minus the value of your deductible. For example, if you have a $500 deductible on your collision insurance policy and your car is worth $10,000, you can recoup $9,500 from your own insurance policy.
3) How much do you owe on your vehicle? vs. How much is your vehicle is worth?
Knowledge is power. NEVER buy a vehicle without knowing that vehicle’s fair market value. There are several websites that can help you; two of the most popular are NADA or KBB. You can go to either site and enter the year, make, model, mileage, etc, and get an idea of what the vehicle is worth. If the asking price is significantly more than the fair market value, and the seller won’t come down, find a different car or a different seller. If you are buying a used vehicle, have an independent mechanic check the vehicle out BEFORE you buy it. Doing these things not only protect you from paying too much and from buying a lemon, but they also protect you from the financial hardship of being upside down on a car when it is totaled before it is paid off.
The law of most states says that an innocent party who has suffered property damage in an automobile accident is entitled to be “made whole,” or put back into the same position that the person was in before the car accident. Put another way, you are entitled to the fair market value of your lost property based on the condition it was in before the damage was done.
When it comes to regular automobile insurance coverage, the amount you owe on the loan for your automobile is not a factor in determining what you are owed by the at-fault party for the property damage they caused to your car. If the amount you owe on the loan is less than what the car is worth you are not in bad shape because the loan gets paid off and you get what is left over. The trouble comes when a person is upside-down on the loan for their car. In other words, you owe more on the car than the car is worth. In these cases, if your car gets totaled in a car wreck, the loan company gets the money for the value of the car, but you will still owe the balance of the loan to the loan company, and of course, you are also now without a car.
Because of this fact, you should try as much as possible to avoid borrowing more than the fair market value of a car when you buy it. You should especially avoid “buy here, pay here” car dealers. These dealers often charge you a high interest rate in addition to an asking price that is several thousands of dollars more than the fair market value of the vehicle. If you have to buy a car from one of these places because your credit score is low, at least try to find one that will sell the vehicle for close to the fair market value, since you will still probably get stuck with a high interest rate.
4) Do you have sufficient “Gap” coverage?
When buying a new (and sometimes used) car on credit, you can oftentimes purchase a type of insurance coverage commonly referred to as “Gap” coverage. The “Gap” refers to the gap between what the car is worth and what you owe on the car to the loan company. The purpose of this type of insurance coverage is to protect you by paying the loan company the difference between what your vehicle is worth and what you owe on the vehicle’s loan in the event that the vehicle is totaled in an automobile accident. Like with any insurance coverage, it is important to read the policy language so that you know what is and what is not covered.
It is especially important to find out what limits a Gap policy places on the amount it will pay over the fair market value of the vehicle. For example, consider a person who buys a Gap coverage policy that will only pay a maximum of 25% over the fair market value of her car (which is worth $10,000). If this person owes less than $12,500 on the car when it gets totaled, she will be covered because the at-fault insurance will pay the loan company $10,000 (what the car is worth) and the Gap coverage will pay up to $2,500 on the remaining balance. However, if the facts are different, and that same person owes more than $12,500 to the loan company when the car is totaled, she will have to pay the remaining balance herself. This means it is very important for consumers to make sure they are not agreeing to finance a car for much more than what that car is worth. If you did get a bad deal when you financed your vehicle, make sure to get Gap coverage that will cover the size of the gap in question.
- Don’t overpay for the vehicle you are buying; know the fair market value beforehand.
- If at all possible, avoid “Buy here, Pay here” car dealers.
- You should carry collision coverage in addition to liability coverage.
- Evaluate your situation and determine if Gap coverage makes sense (It usually does for newer cars).
- Make sure your Gap coverage is sufficient to cover the size of the Gap.