When Does Gap Insurance Not Pay?
Last Updated on August 24, 2023
Gap insurance is optional car insurance that pays in certain situations but not others.
Typically, gap coverage covers the “gap” between the value of a leased or financed vehicle and the amount owing on that vehicle. Most dealerships and lenders require gap coverage.
However, gap insurance doesn’t cover everything. In some cases, gap insurance will not pay.
Keep reading to discover some of the situations where gap insurance does not pay.
Table of Contents:
- What Is Gap Insurance?
- What Does Gap Insurance Cover?
- What Does Gap Insurance Not Cover?
- Gap Insurance Is Designed for Use with Full Coverage Car Insurance
- Do I Need Gap Insurance?
What Is Gap Insurance?
Gap insurance is a type of car insurance coverage that covers the difference in the value of your vehicle and the amount you receive from your insurance company after a loss.
Let’s say you buy a $40,000 truck from a dealership. You owe $40,000 on that truck. You cause an accident six months after buying that truck. The truck is only worth $33,000 because of depreciation, but you still owe roughly $40,000 for it. In this situation, gap insurance could cover the “gap” between the value of the truck and the amount you owe for the truck. Instead of needing to pay an extra $7,000 out of pocket, gap insurance covers the difference.
Gap insurance is not required in any state.
However, all financing companies, lenders, and dealerships require gap insurance. You might already have gap insurance and not even know it. Many companies bundle gap insurance with your monthly car loan or lease. The vehicle is collateral for the loan (it secures the loan), so gap insurance protects this collateral to limit risk for the lender.
Gap insurance is usually provided by your dealership. Some traditional insurance companies, however, sell gap insurance as well. Click here to view our list of the top 5 companies to buy gap insurance from.
What Does Gap Insurance Cover?
Gap insurance is a special type of car insurance that covers a specific thing:
Gap insurance pays when a car is totaled and there is a difference between the vehicle’s value and the remaining lease or loan balance.
If you roll your vehicle, for example, then you could cause significant damage to the vehicle. The insurer may declare the vehicle a total loss, which means damages exceed a certain percentage value of the vehicle (the specific percentage varies by state).
If you did $45,000 of damage to your truck, for example, and your truck is only worth $33,000, then your insurer declares the truck a total loss. At this point, the insurer compensates you for the value of your truck. If you have gap insurance, then your insurer covers the balance remaining on your loan or lease, regardless of the value of your vehicle.
Gap insurance also covers theft. If your vehicle is stolen and deemed a total loss, where it is either unrecoverable or has suffered significant damage, gap insurance fills the gap between the amount you owe on your loan or lease and the actual cash value of the vehicle. It ensures you are not left with the financial burden of paying the remaining balance on your loan or lease after the theft.
What Does Gap Insurance Not Cover?
Gap insurance does not cover many things. Like all insurance, gap insurance does not cover wear and tear or maintenance-related problems with your vehicle, for example. Gap insurance also does not cover accidents where the vehicle is not totaled, nor does it cover liabilities, rental car costs, and other expenses.
Here are some of the things gap insurance does not cover:
The Reduced Value of Your Vehicle After an Accident: After an accident, your car is less valuable than it was before the accident. Although your vehicle has declined in value, your gap insurance does not cover this difference in value.
Maintenance and Wear and Tear: Insurance covers unexpected costs, including accidents and fire damage. It does not cover maintenance concerns or wear and tear. Maintenance is an expected part of owning a vehicle.
Replacement Parts: If your car needs replacement parts after damages, then gap coverage will not cover the cost of replacement parts.
Extended Warranty Coverage Included in the Original Loan or Lease: If your original loan or lease includes extended warranty coverage, then your gap coverage may not cover issues covered by that extended warranty.
Money Rolled Over from a Previous Loan or Lease: If you rolled over money from a previous loan or lease into your new loan or lease, then gap coverage may not cover this original amount.
Personal Injury Costs After an Accident: If you caused a serious accident with another driver, then the other driver may have major injuries. Gap coverage covers the value of your own vehicle after a total loss, but it does not cover injuries to another party. You may be liable for any injuries, lost wages, or damages to other people or property from an accident, and gap coverage will not cover these expenses.
Certain Missed Car Payments: If you missed car payments due to injury, disability, or death, then gap coverage will not cover these missed car payments.
Mechanical Issues: If your vehicle has engine or transmission failures, then gap insurance will not cover the cost of repairing these issues. Fortunately, engine and transmission failures are rare on new vehicles, and most failures are covered by a warranty.
Aftermarket Parts or Components: If you added aftermarket parts or components to your vehicles, like an exhaust system or a wheelchair lift, then these components are not covered by gap insurance.
Collision or Comprehensive Deductibles: Some gap insurance policies cover your collision or comprehensive insurance deductible after a loss, while others do not. A typical collision deductible is $500 to $1,500 per accident, while a typical comprehensive coverage deductible is $250 to $750 per claim. Depending on your gap insurance, you may or may not need to pay these deductibles after a total loss.
Gap Insurance Is Designed for Use with Full Coverage Car Insurance
Gap coverage is not designed to provide complete coverage for your vehicle and liability. Instead, it’s designed to complement liability, collision, and comprehensive coverage (i.e., full coverage car insurance).
To understand how gap coverage works, it helps to understand how a typical car insurance policy works and what it includes:
Liability Insurance: Most states require bodily injury and property damage liability coverage. These coverages protect other people from damages you inflict while driving. If you damage someone else’s car or home while driving, for example, then that person can make a claim through your property damage liability coverage. If you injure someone else while driving, then that person can make a claim for medical bills, lost wages, and other expenses through your bodily injury liability coverage.
Collision Coverage: Optional in all states, collision coverage covers the cost of repairing damage to your own vehicle after a collision. No state requires collision coverage, although most lenders and dealerships require collision coverage on leased or financed vehicles.
Comprehensive Coverage: Also optional in all states, comprehensive coverage covers non-accident-related damages to your vehicle, including fire damage, flood damage, hail damage, theft, vandalism, animal-related damages, and other losses that occur outside of accidents. Most lenders and dealerships require collision coverage on leased or financed vehicles.
If you are leasing or financing a vehicle, then you do not fully own that vehicle. That means you must comply with the terms of your leasing or financing agreement. To protect the collateral of the agreement (your vehicle), your lender or dealership may require full coverage car insurance with gap coverage.
Do I Need Gap Insurance?
You only need gap insurance if you are leasing or financing a vehicle. Gap insurance covers the difference in value between the amount you paid for the vehicle and the actual value of the vehicle.
If you are leasing or financing a vehicle, then your lender or dealership may require gap insurance. It may be built into your payments. Gap insurance is particularly useful for new vehicles that you are financing. If you are buying a cheaper, used vehicle, however, gap insurance might not be worth it.
If you bought your vehicle outright or have finished paying it off, then you do not need gap insurance. There’s no “gap” to cover.
No state requires gap insurance. However, most dealers or lenders require gap insurance.
Final Word on Gap Insurance Not Paying
Gap insurance is a special type of car insurance covering the gap between the value of your vehicle and the amount you owe for the vehicle.
Gap insurance covers certain total loss accidents, and it’s particularly useful on newer vehicles where depreciation can rapidly lower the value of the vehicle in the early days of ownership.
Your vehicle may only be worth $30,000, for example, even though you still owe $35,000 on your car loan. Gap insurance covers this gap.
However, gap insurance does not cover everything. It does not cover accidents that aren’t a total loss, for example, nor does it cover maintenance, wear and tear, liability, and other costs.