Auto Insurance Claims: Whos entitled to Diminshed Value Recovery?, diminished value claim, physical damage insurance

Question
The third party has paid out my diminished value claim and wrote a check payable to (1) the lienholder on my car (seller-financed, so seller retains title until I pay off my loan) and (2) me.  Third party already gave me a check to repair my car, which I did.   
Now the lienholder won't endorse the diminished value check and states that I have to apply the check towards the principle of my loan.  My contract states that they have a security interest in "all insurance proceeds and other proceeds received for the vehicle".  Next, a provision in the contract titled "Physical Damage Insurance Proceeds" states that I must use "physical damage insurance proceeds to repair the vehicle . . . [lienholder] can use any proceeds from insurance to repair the vehicle or may reduce what [I] owe under this contract."

Is it true that I MUST pay the proceeds to the principle??  Do most seller-financed lienholders have the same procedures??  I understand it may be more beneficial to pay off the principal now, but I want the freedom to do what I wish with the recovery.


Answer
Hi Sarah,

In most cases the insurance company is required to protect the interests of the lienholder by including them on the check. Based on the wording of your finance contract that you decribed, it sounds like the lienholder has the right to apply the money to the principal. If says that in the contract then there is nothing you can do.

I hope this helps
Richard Hixenbaugh