Can an Insurance Company Pay Less Than I Owe on My Totaled Car When the Wreck is Not My Fault?

totalled carAfter a wreck, people sometimes find themselves in a situation where they owe more money on their car than the car’s fair market value.  This is what is known as being “upside-down” on a car note.  When this happens and the car gets damaged beyond repair or “totaled,” in a car wreck, people often find themselves getting paid less to settle their claim than they owe on the note. To make matters worse, many drivers carry only the minimum limits required by law—which is often not enough to repair an expensive vehicle. This allows the negligent driver’s vehicle to pay out the “policy limits” and avoid paying the full repair cost. If the vehicle owner purchases gap insurance, he may be able to walk away without being in debt. However, even with gap insurance, a driver will still lose the value of prior payments.

What is the Fair Market Value?

Fair market value is the amount for which you could sell that vehicle one second before it was in the wreck.  Under Texas Law, the measure of damages when a car is wrecked due to someone’s negligence is repair cost or fair market value—whichever is less. If the car can be repaired for less than the fair market value, then the person causing the accident is obligated to pay the repair cost. A car is considered “totaled” when the repair cost exceeds the fair market value.

How Can I Owe More than the Fair Market Value?

When you buy a car, it seems like the amount you pay would be the fair market value.  This is not correct.  Just because you pay 24,000 for a car, does not mean it is worth $24,000.  Included in that final number is the cost of many other things such as the Tax, Title and License fees.  Also, when you buy a car there are many “optional” charges that get added.  If they add an alarm, a fancy radio, a clear coating to “protect against rust,” a tracking device, a subscription to satellite radio, certain upgrades or even a warranty, all of these things will increase the car price but they do not increase the car’s fair market value in kind.  This is because fair market value is largely determined by a book or guideline that the insurance companies go by.  Furthermore, the moment you drive a new car off a lot, it drops in value.  Because it is not new anymore.  All of these little increases to the price can leave you owing more than the fair market value on a note.

What Happens When the Totaled Car Value Exceeds the Other Driver’s Policy Limits?

Similar to being upside-down, you can find yourself receiving less for your vehicle than your note when the other driver’s insurance is less than the value of your car and you do not have your own coverage. In many states, the minimum amount of insurance coverage that a driver is required to carry is less than what many new cars cost these days.  For example, in Texas, the minimum limits for damage to property that a driver must carry by law is $25,000. So if you have a $40,000 car and the driver is only carrying the minimum limits, all his insurance company will pay you is $25,000.

The above scenario is the reason that most automobile lenders require you to carry full coverage on your vehicle.  Full coverage means that you have enough insurance to cover the full fair market value of your vehicle in comprehensive/collision coverage.  However, if that is the only coverage you have, you may still be upside-down on your note.

What is Gap Insurance?

Gap insurance is insurance that protects you from being in debt after a car wreck when you are upside-down on your car loan.  Gap insurance is a second type of auto insurance that lenders typically require because it protects them as much as it does you. If you are upside-down at the time of the wreck, gap insurance pays the difference between fair market value and the amount you owe on your car note.

While gap insurance can keep you from owing money on your wrecked car, it can still leave you in the hole.  Assuming you have put money down or made payments on the vehicle prior to the time of the wreck, those amounts are not protected by the gap insurance.

Conclusion

An insurance company can pay you less than the amount you owe on a vehicle under the above-described circumstances. You can protect yourself from being in debt by carrying comprehensive and collision coverage along with gap insurance. However, even these types of insurance do not fully protect you from receiving less than you paid for a newly-purchased vehicle following a car accident—even when the wreck is not your fault.  If you are still unsure about your rights, contact an attorney who regularly handles car accidents to discuss your options.

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