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Inspired by this question on totaling vs repairing a car and my situation (I'm leasing a car) my question is:

Suppose a leased car, properly insured as per the lease (i.e., comprehensive) is involved in an accident and is totaled by the insurance company.

What are the financial implications to me? I.e., will it cost me money or will I be over it - with no hit to my wallet - after signing some papers?

  • 1
    I suppose there's are international differences. E.g. in the Netherlands, private lease typically includes the comprehensive insurance. This greatly simplifies matters, as there are now only two parties involved. In case of dunk driving, you'd still be responsible, but by default the lease company just loses the car. (They're likely large enough to self-insure) – MSalters Jun 10 at 14:31
  • were you expecting to own the car at the end of the lease, or was this lease on the basis you will return it to the car's owner? as in UK law this makes quite a difference – WendyG Jun 10 at 14:38
  • @WendyG - USA, but fascinating that in the UK it makes a difference! (?) For leases here I can wait to choose at the end of the lease whether to buy (for residual value, spelled out in the contract) or just return it and walk away (assuming within the mileage limit and no damages). – davidbak Jun 10 at 14:57
  • @davidbak so credit with a balloon payment, a lease(an actual lease not just a fancy name for a loan) is where it is illegal for the leasee to own the vehicle at the end of the lease, it has to go back to the lessor, it is all to do with tax and who gets to write the depreciation off as a loss, and who gets to call it a service which is tax deductible in a different way. But as it is business to business the rules are really weird. This comment was correct at the time of me working in vehicle credit about 15 years ago) – WendyG Jun 10 at 15:18
  • Who's liable for the damage in the contract? – Mast Jun 10 at 16:56
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In general leasing requires you to have an insurance policy that meets certain criteria (such as the policy being comprehensive).

However, in the event that the vehicle is written off the insurance company will give you (their belief of) the value of the vehicle at the time, less any excess, whereas the leasing company will expect you to give them (their belief of) the value of the vehicle at the time.

So you will be liable for any "excess" (or "deductible"), plus any difference between what the insurance company will pay and what the leasing company expects.

You may wish to speak with your insurance company or leasing company to determine if this is likely to happen - it may depend on the insurer and/or the leasing company.

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    And that is where you should have been offered and signed what is known as a GAP insurance to cover the possible shortfall of insurance payout. – TomTom Jun 9 at 19:16
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    The leasing company doesn't ask you for the value of the car. The leasing company will demand from you the current buyout value of the lease. This is equal to the purchase price of the car plus interest to that point minus lease payments already made. This is equivalent to the residual value of the car at the end of lease, plus unpaid lease minus remaining interest. – user71659 Jun 10 at 4:49
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    @TomTom - don't remember anything called "gap" insurance but it could have flown by me (I know, I know, SE PF&M contributors - I shouldn't have signed the lease without reading and understanding every word, but unlike you guys I'm a normal human being...guess I'll go and read the contract now...) – davidbak Jun 10 at 14:59
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    @davidbak I don't know it's implications for leasing, but when purchasing, GAP is a big deal. I have a family member that opted to skip the GAP insurance, then totaled the car a year later. There was a difference in what the insurance paid them, and what was still owed on the car, of a few grand, which they ended up being responsible for. – Rich Jun 10 at 15:04
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    Some companies provide a form of GAP insurance automatically on leases. I know when we leased from Ford, it was included. Before you consider buying the protection, make sure it's not included in your deal. I talked with other companies about a lease and they also had the inclusion, presumably to protect themselves and make it seem like a more premium experience to buyers. – JPhi1618 Jun 10 at 15:39
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You must pay every dollar of the value of the car as agreed to on the lease. Period.

Some people carry insurance. This insurance will pay out based on the insurance policy. The usual default is that the insurance will buy you a non-smashed used car of comparable make, model, age and trim options. Minus any deductibles.

Note that these are two different numbers calculated in two different ways.

Generally if the second is larger than the first, the money goes into your pocket. That is your equity in the car.

If the first is larger, that means you were upside-down on that car (negative equity) in which case you must pay the difference.

How would you get upside down? One of several ways. That isn't uncommon in a lease, your car takes the biggest depreciation hit the moment you drive it off the lot. It's now a "used car" and sells for less. Or, your previous lease may have been upside down, and rather than make you write a huge check, they folded this debt into your next lease. Happens all the time, and I just described how you can bury an upside-down loss into another new car purchase.

If you don't have the pile of cash to settle up, you can't just shrug it off like a non-recourse mortgage. You must arrange to settle the debt. Assuming you need a car, practicality may well drag you to do it again, buying another new car simply to rollforward the debt you can't pay.

It is also possible to buy gap insurance to cover exactly this eventuality. The lender might even make you buy it (not unlike a house's PMI). Obviously gap insuance won't cover old debt you rolled into this lease...

  • Why does the insurance write-off affect the equity balance though? The insurer has just replaced one car that was worth less than the outstanding balance of the lease with a lump of cash which can buy a car of the same value outright. However the lease eventually gets settled, does the lessor really care if the asset used is the one originally leased if it has the same value? – Will Jun 10 at 9:27
  • @Will I assume the main reason they care is that it's not the vehicle they actually leased you, and they had no part in determining whether it actually has the same value. Your insurance company may say the original car was worth 10k, and you may buy another car that's the exact same make and model for 10k, but the company you took the lease out with may not agree that this new car is worth 10k. There's probably also legal issues around ownership involved, too; when you lease a car you don't own it, but if you buy a new car to replace a written off lease, you do own the new one. – Anthony Grist Jun 10 at 12:34
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    @AnthonyGrist if the lessor has legal ownership then isn't it the insurer's responsibility to compensate them directly for loss of their property? – Will Jun 10 at 17:22
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    @Will Yes, the property in question is the vehicle. The lease payoff amount is not property, it's a liability. You could sell the vehicle and use the proceeds to pay off the lease. Likely a dealership will help you do this as part of getting a new lease. – JimmyJames Jun 10 at 20:49
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    "you can't just walk away" - err, I am concerned someone reading this might actually think they can be forced to roll-forward into another purchase, and that they don't actually have a choice. Of course they can just walk away - they will likely still owe the debt and could take a hit to their credit score in the mean time, but most times a payment plan can be worked out to avoid a hit, and at-worst a hit to credit while paying off an old debt is usually vastly better than acquiring an even bigger debt for the future. Would be nice to clarify they aren't actually forced, otherwise good answer! – BrianH Jun 11 at 14:28
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There is additional insurance "GAP". It will pay the rest to buying price. My friend after totalling his few years old Audi got interesting offer - received current value of the car counted by insurer as he left them wreck to be sold in their auction - normally they will even substract remaining value of often "useless" the wreck (he bought similar newer from that amount). Anyway as you pay an extra lease fees in addition to new price, there is almost no chance you do not loose, but with the GAP (can be made for new or almost new cars only) you lost leasing charges at most, but if it is not brand new car, it would not have value you receive, so you would use it till accident without quite high costs of wear. Conditions should be similar everywhere - service and work is expensive, so preferred and secure method is often dispose wreck or sold it not repaired... If it would not be your fault, you may ask offender to pay all your costs not only those covered from his insurance, but often at court or you can insure also lawyer coverage and let that company do this work or get all your rights if insurer fail to pay them all for you at their costs. There is also interesting lemon car law in some countries. And 2 examples of greedy services - Ford Transit - plastic cover on starter damaged during accident - insurance company had to pay over €800 for replacement, dealer kept it and sent to Germany for refurbishment, small tick on bumper in Germany (only paint damaged) - probably replacement too as damage paid around €2500. So as you can see and friend insurance liquidator told me services live from accidents and love to do anything to increase final invoice... Insurance companies even require specific invoice counted by their rules as prices or time spent on common service tasks are often even higher then should be (services do not respect nor want to work in-line with maker standard times at all or love to charge for useless or not done work).

  • We have "gap insurance" here in the US, typically required (if not recommended) when buying a car and due to depreciation you will owe more for the car than it is worth (ie, you buy a new car and drive it off the lot and total it 30 minutes later). Assuming you have proper gap insurance, you'll be out your deductible but not much else. – ivanivan Jun 10 at 12:49
  • GAP insurance is primarily a player for long-term new vehicle loans (typically greater than 60 months) and/or low down payment loans wherein the buyer has little to no equity. GAP insurance is less relevant on purchases of good quality used cars where the biggest, "new-car-off-the-lot" depreciation has already been "paid" by the original purchaser. – David W Jun 10 at 20:50
  • Would tell there is no GAP possible on used cars in EU. We do not have so reliable cars and they lost value quickly (ex. even Volvo has official end of live around 150000km). – Tom Jun 11 at 17:20
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This very thing happened to me, I was about 5 months into a 3 years lease when I was caught in a multi-car accident on a highway. The car was destroyed. My insurance company paid out the leaser, and I actually got a refund of overpayment from the leaser (guess the insurance company paid more than was owed by me on the car). (Ontario, Canada, if that makes any difference).

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