Gap Insurance Requirements and Your Rights

When You Don't Need Gap Insurance and How to Refuse It

Car Driving On Country Highway
Defining Gap Insurance. Cavan Images/ Stone/ Getty Images

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 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 Total Loss

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. The reason this is a problem is that often, the rate of depreciation of your car, combined with the interest you are paying on your financing or lease, can leave people in a situation where the value of the car is worth less than the amount owed on the car through the lease agreement or loan. This is a notable problem in the first few years of a new car purchase. So if you have an insurance claim, you could be stuck paying the difference.

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.

Gap insurance pays for this "gap" in value.

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 financing 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

First, let's take a look at when gap insurance is required. 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. In fact, some lease agreements and even finance agreements include a gap clause, as explained below. Research the contract you are signing before making your choice because you may find out you have a gap waiver. The obligation varies by 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 often 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.

When Gap Insurance Is Not Needed

Although gap insurance is highly recommended in many new car purchases, in some cases gap insurance is not needed.

  • 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.

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 one would already have.

    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.

    How to Refuse Gap Insurance - You Have the Right to Refuse

    You have researched your need for gap insurance and realize you don't want to purchase it. 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 still have problems, since gap insurance is a form of insurance and its sale is regulated by your state, you can contact your insurance representative or  state insurance commissioner for further help in securing your rights to refuse gap insurance.