What if you don't use car insurance settlement money for repairs?

If your car has been damaged in an accident or by a covered incident like a hailstorm, you will need to file an insurance claim to be compensated for your loss. If you own the vehicle outright, you may keep the settlement money if you don’t want it repaired or have a more pressing financial need for the cash.

“When clients ask whether they can use an insurance claim check for things other than vehicle repair, I tell them it largely depends on whether there are lienholders,” says Paul Schneider, president of Schneider and Associates, an insurance agency with offices in Newberry and Micco, Florida.

If you have a loan or lease, the financing agency will require you to have the vehicle fixed to maintain its value, Schneider says. In all likelihood, your insurer will reimburse the repair shop directly, and you won’t see any money.

Key highlights

• If you own your vehicle, you can use insurance claim settlement money as you see fit.
• If you have a lien on your vehicle from a lease or loan, your financing agency will not let you keep a claim settlement; it must be used for repairs.
• Forgoing repairs may affect your vehicle’s resale value or compromise safety.

How do car insurance settlements work?

If you have been involved in an accident or other covered incident, you must file a claim with your insurer or the other driver’s insurance company – depending on who is at fault – to receive financial compensation for any physical damage your vehicle sustains.

Depending on your insurer, this multi-step process can take anywhere from a few days to a week or longer. If injuries have occurred or legal action has been taken, the process will take longer.

Step 1: File a claim. You can file online, over the phone, or with your agent. As with all insurance claims, time is of the essence. Document the accident scene with photos and video and get contact and insurance information from all parties involved. If the police were involved, get a copy of the accident report, too.

Step 2: Work with the adjuster. Once you’ve filed a claim, the carrier will assign an insurance adjuster to your case. This person will investigate the accident to determine who was at fault, assess the damage, and calculate the cost of repairs. Depending on state law, your policy details, the severity of the damage, and the extent of the claim, the adjuster may need to inspect your vehicle in person.

Step 3: Receive a settlement. Once your insurer has approved your claim, it will issue a settlement payment. If you own the vehicle outright and opt not to repair it, the settlement check will most likely be issued directly to you—minus the deductible —and you can do whatever you want.

However, your lender will require repairs if you have a loan or lease on the vehicle. Your insurer will walk you through the process of finding a qualified body shop and having repairs made. It will either reimburse the body shop directly or send you a check made out to yourself and your lienholder, which ensures it can only be used for repairs.

Can you keep the insurance settlement money?

If you have a loan or lease on your vehicle, you don’t technically own it yet; the lender does. This means it is up to the lender to decide whether to have the vehicle fixed – and in almost all cases, it will want the car repaired. Your carrier will either reimburse the repair shop directly for work on your vehicle or send you a two-party check that must be signed over to the repair shop as payment. In other words, you cannot keep any insurance settlement money.

If you own the vehicle outright, you can do whatever you want with the settlement check. This holds regardless of whether you are filing a claim with your insurance company or if the other driver was responsible for the accident and you are filing with their insurance company. If you do so, however, it is essential to remember:

• Future claims will not cover the existing damage. If you do not spend the claim settlement on repairs, the associated damage will not be covered if you are involved in a later incident and file a claim to fix your vehicle.
• You will have to pay for repairs yourself. If you opt not to use the settlement money to restore your vehicle to its pre-accident condition, you must pay for those repairs out of pocket if you later decide to repair it.
• Your vehicle will be worth less. Unrepaired damage will lower the resale value of your car, which could be an issue if you plan on selling it in the future.

“Before deciding [whether or not to keep the settlement money], consider factors like the car's safety and operability, and your long-term needs and financial health,“ Schneider says. “If the damage doesn’t affect safety or violates state laws, you might weigh future repair needs against other financial responsibilities.”

If the vehicle has been totaled, you or your lienholder will be compensated for its actual cash value. If you have a loan or lease on the vehicle, your insurer will typically issue a check to your lender. The lender will pay off the outstanding loan balance, and if there are additional funds they will go to you.

After an insurance payout, you may still owe money on your loan and need to cover the balance out of pocket, particularly if it is a newer vehicle. Many lenders require the purchase of gap insurance to cover the shortfall between what your vehicle is worth and what you still owe.

It is a good idea to check with your state’s insurance regulator regarding how claim settlements are handled where you live. Your insurance company is also a handy resource when it comes to clarification on your state laws.

How to decide whether to use your settlement money for repairs

Deciding whether to use your settlement money for repairs or other expenses is a personal decision requiring you to assess your financial needs, the extent of the damage to your vehicle, and the future cost of maintaining that vehicle (e.g., oil changes, gasoline, tires, etc.).

“Sometimes, retaining the funds for future investments or emergency provisions can provide greater value than restoring an aging vehicle,” says Patti Yencho with Professional Insurance Advisors in Vero Beach, Florida.

Here are a few things to consider:

• If the damage is minor, in a spot where it can’t be seen, or if it just doesn’t bother you, keeping the money may be a good option. Remember that if you change your mind in the future, the cost of repairing the damage will fall on you.
• If you have a pressing financial need, keeping the money and leaving your vehicle unrepaired may make sense, assuming it is safe to drive. Remember that your vehicle is now worth less, and if you want to repair it in the future, you will be footing the bill.
• If you can repair the damage for less than your insurance payout, it may make financial sense to do so and pocket the difference. Depending on how severely the vehicle was damaged, you may need to have your repairs inspected by the state before you license the vehicle again.
• You can sell the damaged vehicle for parts or scrap value or donate it to a licensed nonprofit in exchange for a minor tax break.

Frequently asked questions

Will my car insurance go up if I file a claim?

Insurers consider several factors when determining auto insurance premiums, including past claims. If you have been in one or more at-fault accidents, you will likely pay more for coverage when it comes time to renew your policy. On the other hand, some carriers offer “accident forgiveness” coverage and will not raise your rates if it is your first accident and you are not at fault.

Can my car insurance company require me to get repairs made?

If you own your vehicle outright, your insurer cannot make you spend your claim payout on repairs. But if you opt against fixing your car with the settlement money, you forfeit the right to any future compensation from your carrier to repair that damage.

However, if you have a loan or lease on your vehicle, your financing agency will require that the car be repaired to protect its asset. It will either send any settlement money directly to the body shop that repairs your vehicle or send you a two-party check that is also made out to the insurer so that you cannot cash it and spend it at will.

Can I negotiate my car insurance settlement?

Yes, car insurance settlements are negotiable. You can request a larger settlement if you show that the value they put on your vehicle is incorrect, although there is no guarantee your appeal will succeed. Your adjuster should be able to advise you on initiating the dispute process. You must provide documentation to back up your claim, such as repair estimates for your vehicle and receipts for expenses you incurred due to the accident. You may also want to consult a lawyer to negotiate your settlement.