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 consumer analyst Penny Gusner.

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.

What 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.