Does the Cosigner Have to Be on the Insurance?
Does your car loan cosigner need to be on your auto insurance? Unpack the difference between loan liability and policy coverage.
A cosigner on a car loan agrees to assume financial responsibility for the debt if the primary borrower fails to make payments. This arrangement often helps individuals with limited or poor credit secure financing or obtain more favorable loan terms. While a cosigner shares the loan’s financial obligation, their role regarding auto insurance is often misunderstood. The core question is whether a cosigner must be listed on the car’s insurance policy. Understanding this distinction ensures proper coverage and compliance.
Auto Insurance Requirements for Financed Vehicles
When a vehicle is financed, the lender maintains a financial interest in the car until the loan is fully repaid. To protect this investment, lenders mandate that the borrower carry specific auto insurance coverages. These requirements include liability insurance, which is legally required in nearly every state, alongside collision and comprehensive coverage. Collision coverage helps pay for damages to the vehicle from accidents, regardless of fault, while comprehensive coverage addresses damage from non-collision events like theft, vandalism, fire, or natural disasters.
The lender is listed on the insurance policy as a “loss payee” or “lender’s loss payable.” This ensures that if the vehicle is damaged or totaled, the insurance payout goes directly to the lender to cover the outstanding loan balance. If the required insurance is not maintained, lenders may implement “force-placed insurance,” an expensive policy that protects only their interest, with the cost added to the borrower’s loan payments. The primary borrower is responsible for securing and maintaining these mandated coverages throughout the loan term.
The Cosigner’s Name on the Insurance Policy
A cosigner on a car loan does not automatically need to be listed on the vehicle’s insurance policy. Their responsibility is primarily financial, pertaining only to the loan agreement. They assume legal responsibility for the debt if the primary borrower defaults, but they do not have ownership rights to the vehicle. Their name appears on the loan contract, but usually not on the car’s title.
Auto insurance policies cover the vehicle and its drivers, focusing on insurable interest—a financial stake in the car’s physical condition. Since a cosigner often lacks direct ownership, they may not have an insurable interest requiring policy inclusion. The primary borrower is responsible for insuring the car. An insurance policy protects against financial losses from accidents or damage to the vehicle and liability to third parties. Merely being a cosigner on the loan does not, by itself, require inclusion on the insurance policy.
When a Cosigner Might Need to Be Included
While a cosigner on a loan isn’t automatically required on the insurance, specific situations necessitate their inclusion. If the cosigner is also a co-owner of the vehicle, meaning their name appears on the car’s title, it is advisable to list them on the insurance policy. This is because co-owners share legal responsibility for the vehicle, and being on the policy ensures their insurable interest is protected and they are covered for liability.
Another scenario is when the cosigner will regularly drive the insured vehicle. Auto insurance policies require all regular drivers to be listed. Failing to disclose a regular driver can lead to denied claims or policy cancellation. Even if the cosigner doesn’t live with the primary borrower, if they use the car routinely, they should be added as a listed driver. Some lenders may also have specific requirements that request the cosigner be listed on the insurance.
Key Takeaways for Policyholders
Understanding the distinction between loan liability and insurance coverage is important for anyone involved in a cosigned auto loan. A cosigner’s role is primarily to guarantee the loan, not to be on the insurance policy, unless they also co-own the vehicle or drive it regularly. The primary borrower should ensure the vehicle is adequately insured with lender-mandated coverages.
For cosigners, verifying that the primary borrower maintains proper insurance is a protective measure, as a lack of coverage could still impact their financial standing if the vehicle is damaged or totaled. Both primary borrowers and cosigners should communicate openly with their insurance provider and lender. Asking questions about who needs to be listed on the policy and what coverage is required ensures compliance.