Sometimes after an auto accident, a personal injury client finds the auto insurance coverage they had purchased does not nearly cover the auto loan pay back or the lease pay back. There is a “gap” between what is owed and what an insurance company will pay if the auto is totaled.
That moment is usually when the client might recall having “heard” of something called GAP insurance when they were in the finance office of the auto dealer.
GAP stands for “Guaranteed Auto Protection.” GAP insurance is very important when leasing, since the buyer doesn’t actually own the car and usually doesn’t put down a large down payment. If the buyer has an accident, the insurance will pay the current market value of the car, but not the total amount of what is owed the finance company. This difference leaves a “gap” in coverage and an amount that still owed.
Let’s say a $30,000 car is totaled in a collision, there could be a difference owed as much as $10,000, after insurance pays off the finance company.
For this reason, GAP insurance is important for leasing a car. However, if a buyer makes a small down payment or does a “zero down” deal when buying a car, consider a GAP policy because usually the car’s depreciation outpaces the monthly car payment. For example, if a car is bought for $20,000 with no money down, the car might be worth only $14,000 a year later, even though there is still $19,000 owed. If an accident totals that car, the owner will be responsible for paying the $5,000 difference to the lender.
Therefore, GAP insurance is becoming increasingly important for purchases with no money down and a low monthly payment, even though most car buyers have neglected it.
Leasing companies require GAP insurance, so it is usually included in the contract. If GAP coverage is included in the car lease, check to see how much it costs and remember to compare with other insurance companies. Sometimes lease contracts may include a “GAP waiver,” which protects the lessee from GAP charges in the event the leased vehicle is declared a total loss. That protection eliminates the need for an actual GAP policy. Therefore, it is very important to read the fine print before signing the contract.
There are a few things to keep in mind when buying GAP insurance. Although most people purchase it when they begin a lease, some car insurance companies will sell GAP policies any time during the lease term or increase the amount of coverage.
The insured must be in compliance with all terms of the lease. The GAP insurance policy might not be honored without collision and comprehensive insurance coverage. Furthermore, lease contracts generally require carrying collision and comprehensive insurance at all times.
If someone steals the car or it’s totaled in a collision, carefully follow all of the requirements of the auto insurance company. For example, some companies require the owner to continue making car payments on the totaled vehicle until the money from the GAP insurance is paid out.
Finally, consider new car replacement coverage. This coverage may help pay to replace a new car that’s totaled. With this coverage, the policy may allow the insurance holder to replace the totaled vehicle with a new one of the same make, model and equipment; but always read the fine print to be sure.
Please note the information identified herein does not create an attorney-client relationship. Further, the information provided herein is general information and should not be considered legal advice nor shall it be relied upon as a particular answer to your particular legal need. Grabel who is originally from Philadelphia, attended an ABA credentialed law school, is a lawyer in California good standing, has an MBA, an active Nursing Home Administrator’s license and is a licensed Real Estate Broker in California. For questions or to make an appointment, call the Law Offices of Morton J. Grabel in Temecula at (951) 695-7700.