Can I Have Liability Only if I Lease My Car?

In the movies, characters frequently make jokes about rental cars. The lead actor will be in hot pursuit of the bad guy, and in the process of catching the perp, the hero loses a door, both mirrors, and smashes in his windshield. When someone comments about the damage to his once-fancy car, the protagonist says, "Don't worry, it's a rental."

Sadly, many Americans think of their leased vehicles in similar (though less extreme) terms. They feel that since they don't own the car, they don't need to be as worried about its upkeep. They may even try to skimp on car insurance. Not only is this a bad idea, it is normally illegal.

A Shared Financial Interest

If you pay cash for your car, you and you alone have a financial interest in the vehicle. Liability insurance is still necessary in order to protect other motorists and pedestrians, but if you choose to bear all risk as far as damage to your own car goes, that's entirely up to you. Collision and comprehensive (also known as "OTC" or "other-than-collision" coverage) coverages let you transfer some of this risk to an insurer. You pay them a premium, and in return, they will "make you whole again" if you sustain damages in excess of your deductible.

When you have the sole financial interest in your car, you can choose whether or not to transfer this risk to an insurer. But if you still owe the bank on a secured car loan (upwards of 95 percent of car loans are "secured" by the car), then you don't have the sole financial interest - the bank (or other lender) has a shared interest, as well. And while you might not want to pay for collision and comprehensive coverages, the terms of your bank loan mandate that you do.

How This Applies to Leases

The case is even clearer when it comes to leases - you aren't the owner of the car - the company that leased it to you is. In fact, it is the leasing company, not you, that essentially has the sole financial interest in the vehicle. Of course, it isn't going to pay the insurance premiums - that's going to be on you, as mandated by the terms of the lease. And besides, the leasing company will not be driving the car - you will - so your driving record, credit and payment history, etc., will be used to determine your car insurance rates.

Whenever you're leasing, you have to have full insurance coverage. This makes it more important than ever to comparison shop for the best car insurance rates. Not all full coverage packages are created equal, so make sure you're not paying any more than you have to in order to get the coverage that you need. Car insurance is a financial product, and it is one of the larger expenses Americans pay over the course of their lives. A little effort can save you a lot of money over the long haul.