What Is Gap Insurance? What It Pays For and What It Doesn't

What Gap Insurance Actually Pays For

Gap insurance covers the difference between what you owe on your vehicle or motorhome and what it is worth (Washington State Office of the Insurance Commissioner, undated). That difference exists because of the payout basis underneath it: most motor vehicle physical damage policies pay actual cash value (ACV) only, which takes depreciation into account (New York State Department of Financial Services, Office of General Counsel, 2008). If your insurer declares the vehicle a total loss, collision coverage pays that actual cash value and does not pay money you still owe on the loan (Washington State Office of the Insurance Commissioner, undated).

Here is the arithmetic, using the illustration published by the Washington State Office of the Insurance Commissioner (undated) for a vehicle in Washington. It is a regulator's constructed example, not filed loss data. Fault does not change the math, because the settlement comes from your own first-party collision coverage rather than another driver's liability coverage — your state's no-fault or at-fault rules govern injury claims, not the ACV figure on your car.

1. Loan balance on a new vehicle: $30,000.
2. Actual cash value at the time of the accident: $25,000.
3. Without gap coverage: you receive $25,000 minus your deductible, and you still owe $5,000 on the loan.
4. With gap coverage: you receive $25,000 plus $5,000, and you owe $0 on the loan.

Separately, lessors and creditors sell "gap waivers," under which the lessor or creditor agrees not to hold you liable for the remaining amount (New York State Department of Financial Services, Office of General Counsel, 2008). That is a contractual waiver of debt, not an insurance payout.

What It Doesn't Cover

• Interest the lender charges you. Finance charges accrued on the balance are excluded (Washington State Office of the Insurance Commissioner, undated).
• Late fees and missed loan payments. Neither is covered (Washington State Office of the Insurance Commissioner, undated). If you were behind when the car was totaled, the arrears stay with you.
• Extended warranties you added to the auto loan. Service contract amounts rolled into the financing are excluded (Washington State Office of the Insurance Commissioner, undated).
• Your collision or comprehensive deductible. In the Washington regulator's illustration, the $25,000 actual cash value is paid minus the deductible and gap pays only the $5,000 shortfall (Washington State Office of the Insurance Commissioner, undated). Some filed gap forms add deductible reimbursement up to a stated amount; whether yours does depends on that insurer's filed language.
• A loss that is not a total loss. Gap responds when the insurance company decides the vehicle or motorhome is totaled (Washington State Office of the Insurance Commissioner, undated). Repairable collision damage, hail dents fixed under comprehensive, and mechanical breakdown unrelated to a collision produce no ACV settlement for gap to sit on top of.
• A total loss with no underlying physical damage payout. If you carry liability only, or the collision or comprehensive claim is denied, there is no actual cash value settlement from which the gap amount is calculated.

Typical Limits and Deductibles

Gap does not have liability-style limits. What varies is the product you buy, whether it can be canceled, and the deductible on the underlying coverage that generates the ACV figure.

Premium effects vary by state, insurer and underwriting company, vehicle year and model, loan term, and territory. Any quote for gap is an estimate until the policy is bound.

Is It Required, and By Whom

State law. No state financial responsibility law requires a driver to carry gap insurance. It is not part of any state's minimum liability requirement and not part of any state's no-fault medical benefits. Where state law addresses gap, it regulates how it is sold rather than requiring it. New York is the clearest example: N.Y. Pers. Prop. Law § 302A(1) provides that no retail installment contract may be conditioned upon the buyer obtaining motor vehicle debtor gap insurance (New York State Department of Financial Services, Office of General Counsel, 2005). Section 302A(2) provides that if the contract holds the buyer responsible for the gap amount, a gap waiver must be offered — but only if motor vehicle creditor gap insurance is available to the holder from a New York authorized insurer. Section 302A(3) relieves the holder of that duty if it has obtained declination notices or other evidence of unavailability from every insurer authorized to write gap insurance in the state during the current calendar year or the preceding odd-numbered calendar year (same source).

Lenders and lienholders. Outside restrictions like New York's, a lender or lessor can make gap protection a condition of the loan or lease as a matter of contract. That is a credit requirement, not a motor vehicle law requirement, and the consequence of dropping it is a loan default remedy, not a license suspension.

Your own insurer. In Washington, your insurance company may never mention gap insurance or offer it, but must sell it to you if you ask (Washington State Office of the Insurance Commissioner, undated). Availability and filing rules differ by state and insurer, so ask your carrier directly and compare the price against the dealership's quote.