Gap insurance, which is also referred to as loan or lease payoff coverage, is a payout of the difference in the ACV or Actual Cash Value for the car and the present outstanding balance on the lease or loan for the vehicle. There are instances where it will also pay the standard insurance deductible as well.
Gap insurance, however, is not going to reimburse for a car that is deemed to be a total loss while your claim has been denied for coverage or you did not have primary auto insurance coverage on the car when the accident occurred. Mostly, every state is going to require that you have specific car insurance in place, particularly at the very least bodily injury liability as well as property damage liability, for the gap coverage to be effective there needs to be collision/comprehensive as well. The full coverage auto insurance plan is generally a requirement of the lien holder.
Gap Insurance
A vehicle considered to be a total loss due to a covered peril including accidents, fires, thefts, floods, vandals, tornadoes, or hurricanes, will be reimbursable by the insurance carrier for ACV or Actual Cash Value, considering you have collision/comprehensive insurance. This amount is oftentimes much less than the amount that is still due on the loan or the lease payoff amount. When this ACV payment is less than the lease/loan amount due, that loss is the ‘gap’ you will be left to pay.
A majority of car owners don’t realize the amount of depreciation that occurs with a new car. The instant that a new vehicle is driven from the lot, it is worth upwards of 10% less than what was just paid for it. Many believe if the car is a total loss, they will be able to replace it at the amount that was paid for it or at the very least what is owed on it and this is not the case. That’s the reason many auto insurance carriers opt to offer gap coverage or loan/lease payoff insurance which they make available with the physical damage coverage. Car dealers will also offer gap policies as stand-alone coverage at a higher price.
Late Car Payments and Gap
If you happen to get behind on your car loan payments or lease payments, this is not going to cancel your gap insurance policy. It will affect how much your payout is if you have a total loss as gap won’t pay for late payments. This coverage reimburses the difference from the crashed car’s ACV and the balance due for the lien. But gap has exceptions and limitations as it pertains to late payments, overdue payments, payment holidays which would not be covered. Having had these paid up as they should have been, they would not be due when the total loss took place.
Instances Where Gap Insurance Won’t Cover
There are other situations involving your vehicle where gap insurance coverage will not kick in.
- Lease/loan payments that are overdue
- Purchases with loan/lease included costs for credit, life insurance, extended warranties, or other insurances
- Balances that have been carried over from prior loans/leases
- Excessive use penalties imposed under a lease
- Refunds that were not issued for security deposits by the lessor
- Deductions taken by the primary insurer based on wear and tear, previous damages, storage, or towing
- Any equipment added to the car by the buyer that is not factory installed
- Any losses including mechanical, e.g. engine or transmission, or other car problems which are not considered by your insurance company
Gap Insurance With A Private Person Holding the Loan
You won’t be able to get gap insurance coverage if you have a loan via a private person. Your loan needs to be structured through a financial institution that has been proven to be like a bank or a financial company. With these types of organizations, the gap carrier knows what the terms will be and can view the paperwork. There is no way for a gap carrier to substantiate or verify any aspect of the loan with a private party loan that an insurer is going to require.
Is Gap DMV Acceptable?
Gap insurance isn’t the right kind of insurance needed by the Department of Motor Vehicles in order to show financial responsibility to register or renew your registration for a vehicle and won’t be accepted. Gap insurance is strictly an optional type of insurance that is used to assist you when you have a total loss of your vehicle. It is not going to serve as the state-mandated liability coverage which will be requested by the police.
Gap stands for either Guaranteed Auto Protection or Guaranteed Asset Protection interchangeably and that is precisely what its purpose is – to protect your asset.