Car Accident In a Leased Vehicle

Answers to some of the liability and insurance questions that often arise when you're involved in a car accident while driving a leased vehicle.

Leasing a car has become a popular choice for many drivers, but this unique, non-ownership option can add an extra layer of confusion after a traffic accident. In this article, we'll cover the basics of a lease, your car insurance obligations, and how liability rules don't really change when you're involved in an accident in a leased vehicle.

Lease Basics

With a lease, instead of buying the vehicle itself, the lessee essentially pays for the value of the vehicle over the course of the lease term. In most cases, the lease is structured in such a way that the monthly payment is significantly less than it would be if the vehicle was purchased with a small down payment and financed over a three- to six-year period.

As a practical matter, the only major difference between a lease and a purchase is that with a lease you must return the vehicle when the lease term ends (plus pay some extras if there are terms like mileage limits, and you've exceeded them), while with a purchase the vehicle is yours once you pay off the loan.

Car Insurance Is Your Obligation

Whether you lease or purchase your vehicle, you will be responsible for obtaining car insurance in line with:

  • your state's laws, and
  • the terms of the lease.

At minimum, that usually means having liability coverage that will kick in if you cause a car accident. This coverage will pay medical expenses, wage loss, property damage, pain and suffering, and other losses incurred by other drivers, passengers, and anyone else, up to policy limits.

You'll need to read the fine print of your lease and see if you're required to carry additional insurance that protects the vehicle itself, such as "comprehensive" coverage. (Learn more about different types of car insurance coverage.)

If you live in a no-fault car insurance state, you'll need to carry "personal injury protection" or similar coverage, plus whatever coverage is required under the terms of your lease.

"Owner's Liability" Laws

Many states have "owner's liability" laws. These statutes impose some measure of liability on a vehicle's owner, for injuries to persons or property caused by the negligence of whoever is driving the vehicle, as long as it's being driven with the owner's express or implied consent or knowledge.

In the case of a leased vehicle, the "owner" is typically the lessor, i.e., the car dealership or bank/finance company through which the car has been leased, so a state's owner's liability law would seem to expose lessors to liability for a lessee's negligence. However, there are two reasons why this won't typically be the case.

First, it is quite common for a state's owner's liability law to include an exception for persons or entities engaged in the business of leasing vehicles for anything other than a brief period. For example, Michigan's owner's liability law defines "owner" to exclude "a person engaged in the business of leasing motor vehicles who is the lessor of a motor vehicle pursuant to a lease providing for the use of the motor vehicle for a period that is greater than 30 days." Michigan Compiled Laws section 257.401a. So, in Michigan (and many other states with similar laws on the books), if a vehicle lease is for more than 30 days, the lessor is not an "owner" and is therefore not liable for the negligence of the vehicle's operator.

Second, a federal law known as "the Graves Amendment" bars liability claims against lessors and car rental companies (i.e., vehicle owners) under any state law for injuries to persons or property arising out of the vehicle's operation, as long as the lessor or car rental company is:

  • in the business of leasing or renting vehicles, and
  • is not itself negligent or guilty of criminal wrongdoing. (49 U.S.C. section 30106).

Although the Graves Amendment has little impact in states like Michigan that already have similar provisions in their owner's liability laws, it is of great significance in states that would otherwise impose liability on vehicle lessors for the negligence of a leased vehicle's operator.

So, what does all of this mean for you when you have an accident while driving a leased car? The main lesson to be learned here is that the lessor of your vehicle almost certainly cannot be held liable for your negligence, and anyone sustaining injuries to their person or property will look to you (and your insurance company) to compensate them for their damages.

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