Gap Insurance Requirements and Your Rights
When You Don't Need Gap Insurance and How to Refuse It
Gap Insurance Basics
- Gap insurance is not an obligatory requirement of insurance or state laws when you buy a car.
- Gap insurance provides coverage for the difference between how much you owe on your car, and how much it is worth (Actual Cash Value) at the time of an accident that causes a total loss.
When Is Gap Insurance Useful?
When you have an insurance loss, the insurance company will pay you the actual cash value of the vehicle, this becomes a problem when you owe more money on the car than the car is worth.
A gap insurance endorsement solves the problem by paying out the difference between the amount the insurance company would normally pay in a total loss accident and the amount you owe on the vehicle. Gap insurance is optional coverage.
Gap Insurance Helps Avoid Getting Stuck Paying Money If You Have a Claim
If you have a total loss of your vehicle, the insurance company will only pay the actual cash value (ACV) of the car at the time of loss.
This can be a problem for you when the rate of depreciation of your car, combined with the interest you are paying on your financing or lease leaves you in a situation where the value of the car is worth less than the amount owed on the car at the time of the total loss or claim on your car.
This is a notable problem in the first few years of a new car purchase.
If you have an insurance claim, have a gap between what you owe and what your car is worth, then you could be stuck paying the difference without gap insurance or a gap waiver clause.
Gap insurance protects you from having to pay out of pocket for the gap between the actual cash value of the car and the amount you owe to the leasing company or lender.
Example of How Gap Insurance Works
To figure out how gap insurance would help you in a claim, you need to know:
- What you owe for lease agreement at the time of the claim
- What the actual cash value of the car is at the time of the claim
The amount the gap insurance would pay is the difference in the amount you are still responsible for, which is what you owe, minus the actual cash value (the amount the insurance company pays out in a claim). For example, if you owe $8000 on your lease agreement or loan when the car is a total loss claim, and the cash value of the car is only $5000, then the gap insurance would help you by paying the $3,000 difference that the insurance company would not be paying.
Your Car Insurance Company May Offer You Cheaper Rates for Gap Insurance
You can purchase gap Insurance at the dealer, or through your car insurance company by endorsement. You should always check the rate with your car insurance company before considering the dealer's offer.
You Do Not Have to Purchase Gap Insurance At Your Dealer
The insurance industry is very competitive, there are many options to purchase gap insurance online
Gap Insurance Is Not Just for Leased Vehicles
Gap insurance can be useful for new car purchases with financed or leased vehicles. Many people think that if they are purchasing their car, Gap insurance is not necessary. This is a misconception.
Gap insurance is helpful anytime you owe money on a car and will be paying it off more slowly than it will depreciate.
Gap Insurance Requirements and Your Lease or Finance Contract
Lease agreements are created by individual leasing companies, therefore there is not a "standard lease agreement" that we can say would obligate you to have gap insurance. Some lease agreements and even finance agreements include a gap clause, as explained below.
TIP: Research the contract you are signing before buying gap insurance because you may find out that you have a gap waiver. This varies by the finance company, and lease agreement.
Gap Insurance and Consumer Rights
Generally, gap insurance is not a legal requirement. However many dealerships or car loan departments may automatically add gap insurance to the buyer's loan. When purchasing a new car you have the right to deny gap insurance. Before you deny gap insurance, though, make sure you don't need it.
- If you have enough cash reserves to cover the gap between the insurance payoff and the value of your car, then you may not need gap insurance. Keep in mind, this leaves you financially responsible for any gap in amounts owed in the event of a total loss claim.
Check If Your Insurance Company Already Offers a Gap Insurance Clause
- Some insurance companies already provide gap insurance or a similar loan payoff type of insurance built into the vehicle's auto insurance policy, so obviously it would make no sense to pay for an insurance policy that you would already have. Ask your car insurance company if they provide gap insurance.
What Is a Loan Payoff Benefit?
- Some loan companies offer a payoff benefit in the loan agreement. This means that the loan company will take care of the gap in value.
What Is a Gap Waiver Provision in a Lease Agreement?
- If your loan or lease agreement contains a gap clause within the financing contract which releases you from the gap between the insurance payout and amount owed after a total loss then you do not need gap insurance, because there is a gap waiver provision in your finance contract. Ask your car financing department to go over the terms of the contract with you, so you can be sure to understand the clauses. Knowing about this one could save you a lot of money.
Before you sign your loan papers, make sure you get an itemized list of everything that is included in your loan payment and make sure you are not paying for gap insurance or anything else that you did not authorize.
Advise your car dealership that you are refusing the gap insurance if you have decided that you don't need it, or have decided to get it elsewhere.
If you still have problems, you can contact your insurance representative or state insurance commissioner for further help in securing your rights to refuse gap insurance.