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Insuring a car you don't own

Driving a car that belongs to Mom and Dad? How do you insure it?

The question is a common one, and the situation is tricky, says CarInsurance.com consumer analyst Penny Gusner.

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If you are living with your parents, you simply could be a listed driver on their policy. Usually a car insurance policy covers all the licensed drivers in the household who have permission to drive the car.

"It gets difficult when the driver of the car isn't on the title and doesn't live with the title holder," Gusner observes.

insurance for a car you don't ownWhat you need in these cases is "insurable interest." Having insurable interest in property, such as a car, means you would suffer a financial loss if it were damaged or destroyed. Insurance companies require you to have insurable interest to take out a policy because without it you would have no incentive to protect the insured item.

You might even be tempted to damage it on purpose to collect the insurance payout if you were a real jerk.

That's why insurance companies generally require you to own a car to insure it.

Allowing someone to insure a car owned by someone else would also allow a person with a bad driving record to ask a friend with a good driving record to insure the vehicle, points out Karl Newman, president of the NW Insurance Council in Seattle. That would hide the real risk of the driver from the insurer.

"Hiding the real risk then means not enough premium is charged to cover future claims, and eventually this would drive up rates for the good drivers insuring with that company," he says.

Insurance companies also prefer that any listed drivers live in the household.The exception is if you're still in college.

Esurance, for instance, lets policyholders list full-time college students and their vehicles, even if the students are studying in another state, says Esurance spokesperson Danny Miller.

If you're out of college, on your own and driving your parents' car, you have two main options:

1. Buy the car from your parents.

"The cleanest solution is to transfer the title to the young adult," Newman says.

Whether you buy the car, or your parents give it to you, having your name on the title will enable you to purchase your own insurance policy.

Newman recommends this route because:

  • It's the least complicated.
  • As the policyholder, you can begin building your own insurance track record.
  • If your parents are no longer on the car title, they no longer have any liability. Then you're free to purchase the appropriate amount of coverage for your needs, Newman says. Chances are you have fewer financial assets to protect than your folks do.

If your parents simply add your name on the title but still retain partial ownership of the car, they can still be held liable if you cause an accident that exceeds your policy limits. This is something your parents should keep in mind.

"If they wish to keep their names on the car title and the child gets the insurance for it, then it's a good idea for the parents to be added to the policy as additional insureds, so they will be notified of any insurance changes, such as a lowering of limits or cancellation of the policy," Gusner says.

2. Search for an insurance company that will consider your unique circumstances.

"It is possible to insure a car you don't own, but you have to search for the few companies that allow it," Gusner says.

Most companies, such as Esurance, require you to own the car.

Or your parents can search for a company willing to insure the car and list you as the primary driver, even though you don't live with them anymore.

"Some companies will list the young adult as the 'named insured' on the policy with the parents listed as having the financial interest," Newman says. "Some companies will only issue a policy to the legal owner with no exceptions. Other companies will insure the car, list the young adult driver and charge a rate based on the primary driver's [the young adult's] age, driving record, mileage to work, garaging location, etc."

Honesty is the best policy

Above all, be honest with the insurance company, Newman says.

"The best first approach is full disclosure," he says. "A lot of times folks think they can save a few dollars today by not disclosing everything, and that can be really dangerous. Part of the contract you sign says you are going to provide full information."

If you try to pull fast one on the insurer, you might find yourself without coverage and be on the hook for tens of thousands of dollars if you cause an accident.

"I've seen it happen, and it's very unfortunate," Newman says.

More from Barbara Marquand here

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