When you take out a loan on a vehicle, your lender owns the vehicle until such time as you pay the loan back. If your vehicle is damaged in an accident, the lender therefore has a right to some or all of the insurance settlement. Texas law requires lien holders to put their name on vehicle insurance policies and gives them a right to a portion of any insurance claims against the vehicle.
Amount of Lien
If a debtor owes a debt on secured property such as an automobile, Texas law states that the creditor may place a lien on the property for the value of the lesser of the property's current fair market value or the amount that the debtor still owes on the property. If the property is damaged in an accident, the lien holder can claim any insurance settlement up to the amount of the lien.
Release of Lien
If a Texas vehicle owner gets into an accident and the insurance company pays a settlement to the lien holder, the lien is automatically canceled. Thus, the lien holder cannot sue the vehicle owner for nonpayment or take any other collection action against him once the lien holder has accepted an insurance settlement. Similarly, if the debtor pays off a lien using an insurance settlement, the lien is released.
Name on Check
Under Texas law, an insurance company must pay both the owner of a vehicle and any lien holders according to each one's "interest in the property" if the vehicle owner is entitled to benefits after filing a claim. The insurance company may make the check out to both the lien holder and the vehicle owner, or may send a separate check to each party involved in the claim. Both parties must be informed of the existence of any settlement check; a lien holder cannot cash a check without telling the vehicle owner about it.
If a Texas vehicle owner has an outstanding loan on her vehicle, she must add the lien holder as an "additional insured" on her vehicle. Texas lien holders may require the vehicle owner to carry additional insurance beyond the mandatory liability insurance. For example, lien holders may require vehicle owners to carry collision insurance to protect the lien holder's interest in the vehicle if it should be damaged in an accident.