The Insurance Implications of Lending Out Your Car

by Emily Guy Birken

When my son was born in 2010, we had the usual horde of family descend to help us out and coo over the new baby. Since we had only recently moved into our small three-bedroom house, we didn’t have much room for all the family, nor had we gotten any kind of guest room set up. So, to make sure all the aunties and grandparents didn’t have to spend a huge chunk of change on a hotel and a rental car, we let anyone and everyone drive my 1998 Mazda 626 to get around town. I certainly wasn’t using it.

Thankfully, all of my extended family happen to be excellent drivers and my car was returned to me in exactly the same state that it was loaned out. But not every car lender is so lucky. Accidents happen, even to good drivers, and the insurance burden can be a little difficult to figure out when you are loaning a car.

Is Your Car Covered By Insurance When You Lend it Out?

How does car insurance work on a borrowed car?So, before you hand over your keys to your cousin or your best friend, this is what you need to know about car insurance rules for lending your car:

1. Insurance follows the car, not the driver. Even if your friend who is borrowing the car has her own car insurance, it’s your insurance that will take the hit in case of an accident. In that case, your insurance would be the primary coverage and the driver’s insurance would be considered secondary. That means that the borrower’s insurance may be tapped if there is any personal liability and medical expenses, or if your insurance is exhausted in paying for the damages.

This also means that if the driver you lend your car to is uninsured, then you are completely liable for any damage, even if you reach the limits of your insurance coverage. That could mean that the other parties in the accident could sue you for damages if your insurance does not cover all of them. This is where an umbrella policy may come in handy.

2. Permissive and non-permissive use. Any driver who has your permission to use your car—generally family members who live with your and any dependents who live elsewhere (like your son away at college)—are covered under your insurance policy’s “omnibus clause.” In several states, these permissive drivers are only offered reduced coverage while using your car rather than full coverage.

If, however, you have not given a driver permission to use your car, things can get a little more complicated. When a thief goes for a joyride in your car, you are not liable for any damage he or she causes to other cars. However, any damage to your car will likely have to be covered by your insurance.

It gets hairier if someone you know borrows your car without asking. In case of an accident, generally their insurance will be considered the primary coverage and yours would be secondary. However, most insurance companies assume that you have given permission to a known driver unless you have specifically denied them permission on your coverage—in which case, the buck still stops with you for damages.

3. Excluding and listing drivers. If you know that cousin Jason is not to be trusted with a set of wheels, you might consider specifically excluding him from your insurance coverage while he stays with you for a few months, which you can do in every state except Michigan, New York, Virginia, and Wisconsin.

However, excluding a driver can backfire for you. If you allow the excluded driver to take the car and he gets into an accident, your insurance will not cover any damages, meaning you and the driver will both be personally liable. If he takes the car without permission, however, you will generally not be held liable for his poor driving—depending on your state’s laws.

What is likely to save you more in the long run is to simply list all family members who live with you on your insurance, even if they are only staying with you a short while. That means they are covered no matter what while they are driving your vehicle.

The Bottom Line

Know your insurance policy and coverage limits as well as the driving abilities and habits of any car borrower before you hand over your keys. Doing otherwise could really end up costing you.

Photo credit: Robbie Howell

Published or updated September 16, 2012.
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