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What is Gap Insurance? Legal Help

What is Gap Insurance? Legal Resources

We’ve all heard the cliché that a car’s value plummets the second you drive it off the lot. But there is a type of insurance designed specifically to protect owners of depreciating cars from being left out of pocket – gap insurance.

What is gap insurance? It is a form of additional protection that safeguards vehicle owners in the event of a car accident or auto wreck. But it is not without its issues. Gap coverage can be complex, and problems can arise both during a car crash claim and through the purchasing of the gap plan itself.

This article will explore gap insurance in detail to make sure vehicle buyers have the information they need to purchase protection with peace of mind, and car accident victims know their rights after a crash.

What is Gap Insurance?

Gap insurance is a type of coverage used to make sure you are fully compensated in the event of a vehicle accident.

When a car is stolen or totaled in a serious auto accident, the owner will receive a payout through their regular car insurance coverage for the current value of the vehicle.

However, due to the rapid depreciation in the value of cars, trucks, motorcycles, and other vehicles, this payout will often not cover the lease gap, or the amount left on a vehicle loan. In this situation, gap insurance covers the shortfall.

We will cover how gap insurance works in much greater detail below.

The term ‘gap insurance’ has a dual meaning. Most people believe that the name describes the gap between what you owe on the loan and the current value of the vehicle. But the name is actually an acronym, standing for ‘Guaranteed Asset Protection’.

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How Does Gap Insurance Work?

Here’s a detailed breakdown of how gap insurance works, showing exactly why it can be a vital purchase for new car owners:

A car dealer hands over the keys to a new car to its owner, with the car in the background.
  1. Purchase: The process starts with a person buying a new or used vehicle. If a new car is bought outright, the owner will not need gap coverage. However, the vast majority of people will either lease the vehicle or take out a vehicle loan to finance it.

    About 31% of drivers lease their vehicles, while 44% have an auto loan. When you buy a vehicle using a loan, the buyer will normally make a down payment, followed by regular monthly installments until the full amount of money owed on the price of the car is paid off.

  2. Value Drop: Once a car is bought and driven away by its new owner, its value will start to drop. See the chart later in this article for a full rundown of how quickly cars fall in value. This is an accepted part of car ownership, but it can become an issue in the event of a total loss, such as if the vehicle is stolen or wrecked in an accident.

  3. The crushed front end of a totaled car with gap protection coverage.
  4. Accident: In the event of an accident (in which a vehicle is totaled or stolen), a regular insurance company payout will only cover the current value of the car or truck. Due to rapid depreciation, this payout amount may not be enough to cover the amount remaining on the car loan. This could leave the owner thousands of dollars out of pocket.

  5. Gap Protection: If the owner has taken out gap insurance in addition to their comprehensive and collision coverage, it will provide them with an extra payment to cover the shortfall between the regular insurance payout and the amount left on the loan. This will ensure the vehicle owner is not left out of pocket by an accident.

An example of gap insurance at work:

➤ You buy a car for $30,000 and the car is totaled in an accident less than one year later.

➤ The value of your car (due to depreciation) is now $27,300, so this is the amount your car insurers give you.

➤ But there is still $28,500 left on your loan.

➤ Gap protection will provide an additional payout covering the difference of $1,200.

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Do You Need Gap Insurance on a Vehicle?

According to California law, it is mandatory to have basic vehicle insurance. This protects both you and the other drivers on the road in the event of an accident. But there is no such requirement for finance gap insurance.

There is sometimes an exception to this; some lease contracts require a driver to have gap protection. In all other situations, it is completely optional.

While drivers are not required to purchase gap coverage by law, many drivers still decide to purchase the extra coverage. But is gap insurance worth it?

As always, the answer is not black and white. It varies depending on circumstance.

Purchasing gap insurance could be worthwhile if:

  • A small down payment is made on the vehicle (less than 20%)
  • No down payment is made on the vehicle
  • The type of vehicle purchased has a higher than average depreciation rate
  • You drive a lot; high mileage means the car loses value quicker
  • The term of the loan is long (more than three years, usually 48+ months)

These factors could all contribute to the remaining value on a vehicle loan significantly exceeding the value of the car, truck, or motorcycle.

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Gap Insurance: Car Value Depreciation

The graph below shows the average rate of car value depreciation, based on a car bought new for $40,000. This shows the changing value each year.

The grap shows just how quickly the value of your vehicle can plummet once you drive it off the dealer lot. The same information is displayed in the table below, along with the falling percentage of original vehicle cost per year.

Age of Car Value of Car % of Original Value
New $40,000 100%
1 Month $36,400 91%
1 Year $32,400 81%
2 Years $27,599 69%
3 Years $23,200 58%
4 Years $19,600 49%
5 Years $16,000 40%
6 Years $12,000 30%
7 Years $10,000 25%
8 Years $8,000 20%
9 Years $6,000 15%
10 Years $4,000 10%

It is the rapid rate of lost value that creates the need for gap insurance. It can cause a large gulf between the remaining loan amount and the car value, as the vehicle value drops quicker than most people can pay down their loan. The statistics show:

  • Vehicle values drop by nearly 10% in the first month
  • The amount that the car is worth drops by about 20% in the first year
  • A vehicle’s value suffers a steady decline upward of 10% each following year
  • The car depreciated to about 10% of its original value after 10 years

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How Do You Buy Gap Insurance?

If you are looking for information on where to buy gap insurance, and how much gap insurance costs, we have you covered.

There are several sources that you may be able to purchase gap protection from, including dealerships, vehicle loan finance lenders, and insurance companies.

Insurance Company: The best option is often to add the new coverage through your existing firm, if it offers the option to do so. This is the simplest (and usually the cheapest) way for vehicle owners to make sure they are fully covered.

Most companies offer some form of gap insurance, at an average additional cost ranging from $20-$80 per year. For example, Progressive offers gap services for as little as $5 per month. Ask your insurance firm for a quote first.

Car Dealership: A car dealership will sometimes give buyers the option of purchasing extra coverage for a one-time payment. However, this is often less appealing because it will be a larger sum to pay in one go – on average, between $500-$1,000.

Loan Providers: Vehicle loan lenders will often provide gap coverage for a monthly payment, which can be added to your monthly loan repayment. However, buyers should beware; through this method, you will end up paying interest on your gap insurance.

Top tips:

  • Check Current Coverage: Check with your insurance provider to make sure gap coverage does not come with your standard coverage before purchasing extra protection.

  • Is it Still Worth it?: Reassess every year – gap insurance is valuable when there is a significant gap between the value of your car and the amount left on your loan. As you pay down your loan, it may no longer be necessary for you.

  • Get the Right Gap Protection: Check the terms of your insurance; not every form of coverage will completely bridge the payout gap.
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Gap Insurance Legal Disputes

Gap insurance is an important form of coverage because it protects owners from financial problems if they are involved in a crash. However, while it provides a vital form of protection, it is not without issues.

The paperwork for a car owner to purchase gap insurance.

There are instances in which the vehicle owner opts for an alternative source, instead of purchasing gap coverage from their insurance company. This can sometimes lead to problems.

When it comes to securing gap insurance coverage through dealerships, there are significant risks. This coverage is largely unregulated, and some shady dealers sell forms of gap protection without being licensed to do so. Other issues are caused by dealers purchasing gap coverage through an insurance company and then selling it at a massive price mark-up by pressuring the buyer.

Other gap protection issues might include inaccurate vehicle valuations, or other problems arising after a car accident. No matter the circumstances, it is best to handle a gap insurance claim with the help of a legal professional.

An experienced car accident lawyer or personal injury attorney who has extensive knowledge of the legal system will be able to ensure that contracts are upheld, vehicle evaluations are done lawfully, and accident victims are made whole.

Contact Bisnar Chase for more information on auto accident lawsuits and gap insurance claims. Call (800) 561-4887 or click to email.

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