Answering the question: "What happens to a car lease if you are in an accident" is not simple. A car lease is a legal contract, which stipulates the car will be returned to the lessor at the end of the lease. The assumption is the vehicle is returned in the original condition, with considerations made for normal wear and tear, and any other exceptions agreed upon at lease signing.

However, what if a car is totaled, and there is no vehicle to return? What happens if insurance payments do not cover the total amount remaining on the lease? Are there any laws to protect the lessee from suffering financial loss if a leased car is wrecked and totaled by the insurance company? What steps do lessors take to minimize their risks? Let's examine these points one by one to determine the answers to these and other frequently asked questions (FAQs) about this topic.

Wrecked Leased Car? Could Be Trouble!

Are You in Big Trouble if You Wreck Your Leased Car?
Credit: Wrecked car, Attribution Sebastian Ballard CC BY-SA 2.0 via Wikimedia Commons,

What Happens First?

The first thing that happens when a leased vehicle is wrecked is a determination of the extent of the damages. In the best of circumstances, the amount needed to repair the damage is equal to or slightly less than the amount the insurance company will cover.

The insurance company issues a check to the lessee, who has the car repaired, and the situation is handled with a least amount of hassle. The only out-of-pocket cost to the lessee in this scenario is their deductible.

To keep this best case scenario, the lessee can protect his or her interests by having the car repaired at a reputable repair shop, and insisting that the shop use only OEM (original equipment manufacturer) parts. This helps avoid any potential problems at lease end. Next, let's look at the worst case scenario, which is when the car is totaled by the insurance company.

What Is the Meaning of a Totaled Car?

When a car is totaled, it simply means that in the opinion of the insuring company, it will cost more to repair the vehicle than the vehicle's actual cash value, plus any potential salvage value, plus the expense of providing a rental vehicle if necessary.

Again, in a best case scenario, the insurance coverage would be adequate to cover any repairs with no gap in coverage. However, in the real world, there is a potential for there to be a costly gap in coverage, and it falls on the lessee to pay any deficit funds. Having to come up with large dollar amounts to pay out-of-pocket expenses, and dealing with the inconvenience of being without a vehicle, is a nasty surprise.

Do You Need Gap Insurance?

Let's talk about GAP insurance. This type of coverage covers the gap—or difference—between the amount the insurance company pays for an accident claim, and any difference that could be owed by the lessee. Because policies and coverage amounts vary greatly, the best advice is to check with your insurance agent regarding the specifics of this type of coverage should you lease a car. GAP insurance cannot be purchased after the fact, and usually is purchased when the lease is originally signed.

What if you think the insurance company made an error when calculating the actual cash value of your vehicle? Most companies have a dispute process and will consider any documentation you have to prove that the vehicle has a higher cash value. After evaluating all the evidence, they could make a higher offer or refer the issue to remediation. The actual dispute process is determined by each individual insurance company.

GAP Insurance

Other Issues When You Wreck a Leased Car

As mentioned earlier, the leasing company expects to receive the car back at lease end. The lessee expects to make a final payment, and any lease end charges or fees, and either walk away, if the lease is a closed end lease, or buy the vehicle for the difference of the market value versus the residual value if the lease is open-ended.

The problem arises when there is no vehicle to be returned. Here are some different scenarios that might play out:

  1. The lease contract may have a clause that protects the lessee in event of an accident that results in a totaled car, and the lessee would be relieved of any financial obligation.
  2. If your state has a diminished value law that requires the insurance company to reimburse the vehicle owner for the lower resale value of the wrecked car, you may qualify for some monetary relief. Depending on the language of the law, the benefit may fall to either the lessor or the lessee, but not both.
  3. The lessor may carry an umbrella policy that provides gap coverage to lessees.
  4. The lessor may make payment arrangements with the lessee to pay the remaining monies owed.
  5. The lessor may demand payment in full of all monies due.

Please note that all these possible scenarios are based on general information and will vary from state to state and from leasing company to leasing company. Before entering into a lease agreement, consumers are wise to make sure they understand the full legal ramifications of the contract.

The Bottom Line

In this brief overview, we've looked at what happens to a car lease if you are in an accident, and learned that the lease does not cease to exist just because the vehicle is wrecked. In the best of circumstances, you can have the car repaired and continue to enjoy the use of it until the end of your lease period. In the worst of circumstances, you may end up paying thousands of dollars in out-of-pocket expenses and end up without a vehicle.