Gap insurance is a specific type of automobile insurance. If a borrower’s car is totaled, the loan covers the “gap” between what is owed on the car and its actual market value.
Gap insurance can be obtained in two major ways. The first option is to purchase gap coverage directly from an insurance broker. Another option is to purchase a “gap waiver” agreement from a finance manager. Gap coverage is generally finalized at the dealership when the car is sold.
A neutral third-party appraiser determines the car’s value at the time it was totaled. There is no clear regulation of gap waiver processes, which can sometimes cause problems for borrowers and car owners. Lender policies and contracts will determine actual coverage, interest rates, and fees.
How Does Gap Insurance Work?
In most cases, collision insurance only covers the car’s fair market value, so it won’t help the borrower pay off a car loan. The gap loan comes into play here.
Consider the case of a $20,000 car loan. Let’s say your car was totaled, and its value at the time was $17,000. Collision insurance might cover the $17,000; however, this means you would still owe $3,000 on the loan. With gap insurance, the borrower would not owe anything on the loan after the payoff of $20,000 occurs. The gap coverage would cover the difference between the value and the loan (in this case, $3,000).
What Does Gap Insurance Cover? What Does it Not Cover?
Gap insurance may also be referred to as loan gap coverage or lease gap insurance. The coverage is only available if you are the original loan or leaseholder. In most cases, gap insurance is not required to own or purchase a vehicle.
Despite being optional, it can be beneficial. You may decide to purchase gap insurance for your new vehicle if:
- You made a down payment of less than twenty percent;
- The vehicle has been financed for sixty months or longer;
- You are leasing the vehicle, as carrying gap insurance is generally required for a leasing agreement;
- You have purchased a vehicle that depreciates more quickly than average; or
- You have rolled over negative equity from an old auto loan into your new one.
Your gap insurance may also cover your losses if your vehicle is stolen. In the event of an accident or theft, gap insurance alone would not be sufficient to cover your losses. Combined with other auto insurance types, it can minimize your losses.
Gap insurance does not cover the following items:
- Repairs to the damaged or totaled vehicle;
- The value of the vehicle, or balance of the loan, if the vehicle is repossessed;
- A rental vehicle while your own vehicle is being repaired;
- The diminished value of your vehicle post-accident;
- A downpayment for a replacement vehicle; and
- Extended warranties added to your car loan.
What Are Some Common Gap Insurance Disputes?
There are several legal issues, disputes, and concerns related to gap insurance. The biggest problem with gap insurance is that certain types are not regulated. An example of this would be gap waivers. As a result, car dealers can sell gap products to consumers without much accountability, even though they aren’t licensed insurance agents. It is often less expensive to purchase gap insurance through a licensed insurance agent than through an auto dealer.
It is also impossible to ensure that gap waiver products are sold at reasonable prices or to consumers who really need them. Car dealers have sometimes obtained gap insurance from a provider for around $50-$100. Afterward, they resell the product to car customers for $300-$500.
Since the paperwork can be completed at the dealership, car buyers may feel pressured to purchase such products.
Gap insurance disputes also include:
- Gap Insurance Fraud: This is a form of insurance fraud. Gap insurance fraud could include things such as not disclosing all of the insurance terms, withholding information, or presenting fraudulent loan information;
- Valuation Disputes: These are disputes over the car’s valuation, such as stating that a car is worth $18,000 when in reality, it’s actually worth $20,000. Therefore, if the gap insurance pays out $18,000, the person might still owe $2,000;
- Vague Language: This could include language appearing in fine print, language embedded at the back of the contract, or vague terms intentionally meant to confuse the average consumer into agreeing to something they ordinarily would not agree to; and
- Insufficient Instruction: An example of this would be if no instructions were given regarding filing a claim or contesting the gap policy. Again, this is because car dealers are not licensed insurers.
Gap insurance does not cover death or car payments in financial hardship or job loss cases. A gap insurance agent or attorney can help you determine exactly what gap insurance will not cover, which may lead to a dispute later on.
What Are Some Legal Issues Associated with Gap Insurance Policies?
There are some very distinct legal issues associated with gap insurance policies. Dealers are especially prone to issuing unregulated gap waivers.
Conflicts include:
- Disputes over the value from the appraisal
- Issues regarding the accountability and certification of persons issuing gap insurance policies
- Insurance fraud claims
- Various terms embedded in the small print of the policy
The most common dispute involves the amount due after an accident in which the car is wrecked. In some cases, the non-breaching party may need to sue for damages. The policies that affected many loan consumers have sometimes led to class action lawsuits.
What Are Remedies for Gap Insurance Conflicts?
Gap insurance conflicts generally require legal action to resolve. In some cases, serious violations of law or breaches of the contract require a lawsuit. Additionally, in some states, anyone who assists an unlicensed person in selling insurance products may also be liable for losses caused by the unlicensed sale.
In a gap insurance lawsuit, damages can be awarded to reimburse the non-breaching party for its losses. This award provides conflict compensation. Based on the case’s specifics, the liable party may also be responsible for attorney’s fees and court costs. There have been many instances in which gap insurance disputes have resulted in class action lawsuits due to the fact that many people were affected by one issue.
Do I Need a Lawyer for Help with Gap Insurance?
It can sometimes be difficult to understand gap insurance. State laws governing gap insurance may also vary. You may wish to hire an insurance lawyer if you need help with gap insurance or any other types of automobile insurance issues. Your attorney can assist you in researching local laws to determine your legal rights. Lawyers can represent you in court if you have a legal dispute and need to file a lawsuit.
Insurance issues can often be confusing and frightening to deal with. At LegalMatch, we understand this. Do not hesitate to hire an insurance lawyer if you need help with gap insurance. One of the many insurance lawyers on LegalMatch can help solve your issues. You are not alone – use LegalMatch to find the right insurance lawyer for your gap insurance or other automobile insurance issues.
