Every so often a pal asks to borrow your car, and you lend it. Ever stop to think about who would pay if he got into an accident? The short answer: You would.
“When you lend someone your car, you lend them your insurance,” says Lynne McChristian, a spokeswoman for the Insurance Information Institute.
Car insurance follows the vehicle, not the driver. Although your friend’s auto insurance might kick in eventually, your policy is primary — and filing a claim could cause your rate to go up. Before you decide to let someone use your wheels, consider what it could do to your finances.
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Friends causing car accidents
Generally speaking, your auto insurance policy applies to all drivers in your household — spouse, partner, roommates or relatives — who have permission to use your car. Non-household members are usually considered “permissive” drivers.
Suppose you lend the car to a friend, who causes an accident. Your liability insurance would pay to repair damage to the other vehicle and any medical bills, up to your policy limits. Once those limits are reached, your friend would be responsible for what’s left over. Still, the incident goes down as a liability claim against you and could cause your rate to go up at renewal time.
If your friend doesn’t have auto insurance, then he could be sued for whatever your policy doesn’t cover. You might be sued too, since your car was involved. According to Jury Verdict Research, the median jury award for vehicular liability was $34,877 in 2013, the most recent year for which data was available.
Then there’s the damage to your own car. For that, you’ll need to tap your own collision coverage — if you have it — and that will be another claim on your record that could lead to a rate increase. If you don’t have collision coverage, you’ll have to find the money to pay for repairs.
Listing car borrowers on your policy
People who often borrow your car might not be covered — because a regular driver of your car should be listed on your policy. It’s best to add frequent borrowers to your policy, such as roommates, to make sure your insurance will pay for accidents.
Adding drivers can affect your rate. A younger person or someone with a spotty driving record could cause your rate to go up, but adding an excellent driver could actually lower it.
Insurers in eight states are allowed to reduce coverage limits for anyone — even occasional borrowers — not specifically listed on your policy: California, Colorado, Michigan, Missouri, Ohio, Oklahoma, Pennsylvania and Washington. That means even if you have purchased a good amount of liability insurance, coverage could be reduced to state auto insurance minimums if your friend crashes. To avoid this, consider listing on your policy any non-household members who occasionally borrow your car.
If friends don’t have their own insurance, they could buy non-owner auto insurance. If they cause an accident in your car, your liability insurance would still be primary and their non-owner insurance would pick up any remainder. Non-owner insurance doesn’t include collision or comprehensive coverage, so you’d still have to use your own collision insurance for damage to your car.
Driving your car without permission
Suppose a friend or relative takes your car without permission and causes an accident. In that case, his insurance could be primary and yours secondary. But if that person is uninsured, you and your insurance will likely be responsible. Your insurance company will likely assume the relative or friend had permission, unless you can make it clear that he didn’t.
It can be hard to say no to someone who asks to use your car. But before saying yes, decide whether you trust the borrower to drive safely, since a single accident could have a lasting impact on your finances.
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Donna Freedman is a contributing writer at NerdWallet, a personal finance website.
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