How to insure a leased vehicle

When you lease, the vehicle belongs to the leasing company for the whole term and you are contractually responsible for insuring it to the company's standard. That standard is written into the lease: full physical damage coverage, a maximum deductible, liability limits often higher than the state requires, and the company named on the policy as loss payee and additional insured. The company checks compliance through the carrier's reports, and a policy that falls short is a breach of the lease, which the company can cure by buying its own coverage and billing you for it, at a price you would not choose.

Two further things make a lease different from a financed purchase. The car's value in the early months is below the payoff on the lease, so a total loss can leave you owing money on a car that no longer exists, which is what gap coverage is for. And the car goes back at the end of the term to be inspected, so every scrape you decided not to claim is priced at turn-in. This guide walks through the insurance clause, the policy setup, the gap decision and the claims handling for leases in Arizona, Nevada, Utah and Idaho.

What to gather

Do this before signing, if you can; the lease insurance clause is easier to satisfy than to renegotiate.

• The lease agreement, or the dealer's draft of it, open to the insurance section.
• The leasing company's exact legal name and the address it wants on the policy for the loss payee and additional insured clauses; the dealer's finance office has these.
• The vehicle identification number, the agreed value or capitalised cost of the lease, the residual value at term end, the term and the mileage allowance.
• Your current auto declarations page, so you can see how your existing limits and deductibles compare with what the lease demands.
• The dealer's quotes for gap coverage and for any excess wear-and-tear product, so you can compare them with what your carrier offers.

Step one: read the insurance clause

The clause sets out four things. First, the coverages required: collision and comprehensive on the car, without exception. Second, the maximum deductible on each, which is usually a fixed figure and is often lower than what a driver who owned the car outright would choose. Third, the liability limits, stated as bodily injury per person and per accident and property damage per accident, which are commonly set well above the state minimum because the company is a defendant in any serious crash involving its car. Fourth, the requirement that the company be named as loss payee, so that a physical damage payment goes to it or jointly, and as additional insured, so that it is defended under your liability coverage.

Note anything else in the clause. Some leases forbid business use without notice; some require notification of any claim above a stated size; most require the policy to be kept in force until the car is returned and the return acknowledged. If a requirement is impractical, the moment to say so is before signing.

Step two: set up the policy to match

Add the vehicle to your policy, or write a new one, with collision and comprehensive at deductibles no higher than the lease allows, liability at or above the lease's stated limits, and the leasing company listed exactly as the clause names it. The carrier will send the company proof; ask for a copy of the declarations page showing the loss payee and additional insured and send it yourself as well, because a missing or misspelt lienholder is the commonest reason for a compliance letter from the company.

Raise your liability limits if the lease requires more than you carry, and consider whether the increase should apply to every vehicle on the policy, since the limit is usually set per policy rather than per car. Then check the extras that a lease makes more valuable: rental reimbursement, because you will be paying the lease during a repair whether or not you can drive; and original manufacturer parts or new-car replacement coverage where the carrier offers it, because a lease return inspection can flag non-original repairs. Uninsured and underinsured motorist coverage should stay at the liability limit as it would on any policy.

Step three: decide on gap coverage

Gap coverage pays the difference between the car's actual cash value at a total loss and the amount still owed on the lease, which in the first year or two of most leases is a real number, because the car depreciates faster than the lease balance falls. Without it, a total loss leaves you paying the shortfall to the leasing company for a car in a scrapyard. There are three sources: the lease itself, which often includes a gap waiver in the payment as a matter of course; the dealer, which sells it as a separate product at signing; and your own carrier, which offers it as a loan or lease payoff endorsement for a small addition to the premium.

Check the lease first. If it already includes a gap waiver, buying more is duplicate coverage. If it does not, compare the dealer's single upfront price against the carrier's endorsement, which is usually far cheaper and can be dropped once the car's value has caught up with the balance. Read what each excludes: unpaid past-due payments, excess mileage charges, the deductible, and amounts rolled in from a prior trade are commonly left out.

Step four: handle claims with the turn-in in mind

On an owned car, a small dent is often best left unclaimed and unrepaired. On a leased car, the end-of-term inspection charges for damage beyond normal wear, so an unrepaired dent becomes a bill at turn-in at the company's rate. The calculation becomes whether to pay for the repair yourself, claim it and take the rating hit, or accept the turn-in charge, and the answer depends on the deductible, the estimate and the time left on the lease. Keep records of every repair and use shops that will warrant their work and use parts the inspection will accept.

Physical damage payments are made to you and the leasing company jointly, and the company may insist the money is spent on the repair. On a total loss the carrier pays the company the actual cash value, gap coverage pays the shortfall, and the lease ends; you do not receive the money or a replacement car. Tell the company promptly of any significant claim, as the lease requires, and read the total-loss valuation as carefully as an owner would, because an undervalued car increases the gap and if there is no gap coverage that is your money.

Common mistakes

These are the ways a lease turns into an unexpected bill.

• Carrying a higher deductible than the lease allows, and finding out from a compliance letter or at a claim.
• Getting the leasing company's name or address wrong on the policy, so it never receives proof and force-places its own coverage.
• Paying twice for gap coverage, once inside the lease and once at the dealer.
• Buying no gap coverage at all on a lease with little or nothing down.
• Leaving small damage unrepaired and receiving the turn-in charge.
• Cancelling the policy the day the car is dropped off, before the company has acknowledged the return.
• Assuming the lease's required liability limits are enough for the household. They protect the leasing company; the household's own exposure may call for more, and an umbrella.
• Letting a friend or family member drive regularly without adding them; leases often restrict drivers as well as use.

A worked example

Suppose a driver in Salt Lake City leases a new SUV for three years with nothing down. The lease requires collision and comprehensive with deductibles no higher than $1,000, liability of $100,000 per person and $300,000 per accident, and names the leasing company as loss payee. Her current policy carries $500 deductibles and $50,000 per person liability. She raises the liability to $100,000 and $300,000 on both her cars, keeps the $500 deductibles, adds rental reimbursement, and adds the carrier's lease payoff endorsement for say $40 a year after confirming the lease has no gap waiver. Eight months in, the SUV is totalled in a collision on the interstate. The carrier values it at $34,000 and pays that to the leasing company; the lease payoff is $39,500, and the endorsement pays the $5,500 difference less her $500 deductible, which she pays herself. Without the endorsement she would have owed $5,500 on a vehicle she no longer had. The dealer's gap product was priced at $700 at signing. All figures are hypothetical.

How to use this

Send us the lease's insurance clause and your declarations page before you sign, or as soon after as you can, and we set the policy to the clause, get the loss payee wording right, price the carrier's gap endorsement against the dealer's, and tell you whether the lease's liability limits are enough for your household or only for the leasing company. If what you already carry satisfies the lease and the gap is already covered, the answer is to add the car and change nothing else.