What Happens When Cashing a Car Insurance Check? Do I Have to Use it For Repairs?

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Once your car insurance claim has been approved after an accident, your insurer will issue a check to pay for the repairs. But what happens to the money isn't always straightforward. The most common scenario after you've made a car insurance claim is that your insurer will send you a settlement check directly, then you'll cash it and use the money to pay your mechanic once they've finished the repair. But several factors, such as whether you have a lease or loan on your vehicle and whether your insurance company encourages you to work with a preferred mechanic, influence how the process works, and can change how much control you have over how the car insurance check is spent.

Your Insurer Might Send the Check Directly to a Repair Shop

Many car insurance companies encourage their customers to work with one of their preferred or "Direct Referral Program" auto body repair shops. You can usually choose whichever repair shop you like, but if you go with a preferred shop, your insurance company will likely pay the repair shop directly. In other words, you'll never receive an actual car insurance claim check; you'll only be responsible for paying your deductible to the mechanic.

A benefit of going with a preferred auto repair shop is that your insurance company and the shop will cover any additional work for free if something goes wrong or it turns out there's more work to be done than originally thought. Plus, you won't have to worry about acting as a mediator between the shop and your car insurance company.

You May Need Permission From Your Lienholder Before Cashing the Check

A common requirement in car leases and loans is that you must keep the car in good working order for the term of the agreement with the lease or loan company. If you have a lease or loan on your car, you probably have certain insurance requirements, and a common one is that your the company is named on your insurance policy. As a result, you may find that the claim check issued to you by your insurance company has both your name and the name of your loan company on it.

If that's the case, you will need the finance company to sign off on the insurance check before you can cash it. The amount of oversight your loan company will want through the claims process can vary considerably, and it's essentially up to the loan company how much control it takes. Sometimes a representative will just verify that the accident occurred, sign the check and send you on your way. It's also possible that your loan officer will require you to sign the car insurance check over to the company, and it will pay the repair company on your behalf.

Things are a bit different if you were involved in a crash where the other driver is at fault, and their liability coverage is the one paying the claim. This is called a "third party" claim: You are the third party and the at-fault driver and their insurance company are the first and second party, respectively. The other driver's insurer would not know if your car is financed or not and doesn't have a contractual obligation to your financing company. As a result, the settlement check will typically be made out directly to you.

But regardless of whether the loan company's name appears on the check, you're required by the terms of your lease or loan to keep your car in good condition, so it's best to repair your car according to the terms of your lease. Otherwise, you could be hit with a penalty at the end of your lease or even get your car repossessed.

When You Don't Have to Use Insurance Claim Check Money to Repair Your Car

If you own your car outright, and your insurance company cuts you a check after you file a claim, you can technically do whatever you want with the money after you've cashed it, like go on vacation or buy a new TV. You're not technically required to spend the money to fix your car. But there are some considerations to keep in mind before you do so, whether you try to find a mechanic who will fix the car for less, try to fix the problem yourself or ignore the issue altogether and use the money for another purpose.

The biggest drawback to using your car insurance claim check money for another purpose is that you'll be responsible for any additional costs if the vehicle's problem gets worse. Regardless of whether it's because you ignored the issue and it worsened over time, or the malfunction was exacerbated during the course of an unprofessional repair, your car insurance company won't pay for additional damage. You'll be on the hook for any additional costs.

Additionally, auto insurance companies won't repair things more than once and are wary of people committing fraud by submitting the same claim multiple times. So if you experience the same issue again—like if your car is damaged by hail multiple times—your insurance company will investigate thoroughly to make sure you're not committing fraud. There's also a good chance it'll deny the car insurance claim if there's evidence that the damage was pre-existing, even if the damage was primarily due to a second incident.

State Laws Regarding Car Insurance Claim Checks May Vary

For the most part, insurance laws in the United States are set at the state level—it's a big part of the reason why insurance rates vary so much state to state. So there may be specific requirements for how you and your insurance company deal with insurance payouts. For example, in Massachusetts, insurance companies are required to make the check out to the person covered by the insurance policy, unless the insured person specifically requests otherwise. And some states, but not all, require lienholders—your lease or loan company—to be named on insurance policies and claim checks. Double-check your state's laws regarding insurance checks to make sure you and your insurance company are both in compliance with the law.

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