Gap Insurance: Avoid a Nightmare in the Aftermath of an Accident

By: Sandra S. Gregor, Fredericksburg, VA Personal Injury Attorney

Imagine the following scenario:  You buy a new car – or a car that is new to you.  Days, months, or perhaps even years later, you are in a car accident that ‘totals’ the vehicle. The car can’t be driven and the cost to repair it is enormous.  The insurance company offers you $15,000 for your loss but you still owe $20,000 on your loan. You no longer have a car but you are still obligated to pay $5,000 to pay off the note.

At Allen and Allen, our clients face this nightmare on a regular basis. Unfortunately, after the fact there is very little that can be done. Many cars depreciate in value faster than owners can pay off their loans.  This hassle can be avoided by purchasing “GAP insurance” whenever you take out a loan to purchase a car. This valuable protection can make all the difference in the aftermath of an accident.

Your car is considered ‘totaled’ after a car accident when an insurance company determines that the cost of repairing the damage exceeds a certain percentage of the entire value of the vehicle .[1] Rather than spend the money necessary to repair the car, the insurance company gives you the full cash value of the car in the condition it was in immediately prior to the collision. By way of example, if a 2009 Honda Civic in good condition is worth $7,000 and the costs to repair the property damage after a collision are $6,800, the insurance company will declare the vehicle a total loss and issue a check to the owner for $7,000. That vehicle is listed as a total loss.

The means of determining pre-collision value is not prescribed by law.[2] Instead, insurance companies determine the amount they will pay for ‘totaled’ vehicles by calculating the “actual cash value” of the car. They look at the purchase price for comparable cars in your location and use independent auto-value guides like Kelley Blue Book and NADA to determine this price. The amount owed on the vehicle does not come into the equation and will not be considered. 

GAP insurance stands for “Guaranteed Auto Protection.”  In the event your vehicle is totaled, GAP insurance covers the difference between the amount you owe on your loan and the car’s actual cash value.[3] Returning to our example above, GAP insurance would pay the $5,000 difference between the insurance company’s pay out of $15,000 and the $20,000 left on the car loan. GAP insurance would makes the owner whole even if they owe more on the car than it was worth before the crash.

GAP insurance is particularly important when you make a low down payment towards the purchase of your car and thus owe more on the vehicle, get a loan with a high interest rate, or choose a longer term loan. As with all insurance policies, there are limits to what GAP insurance will pay, so it is important to go over the details of the coverage with your insurance provider so you know exactly what you are purchasing.[4]

You can purchase GAP insurance through your own auto insurance company, through other large carriers or through companies that specialize in this type of coverage. You can also purchase it through your car dealership, where the costs of the coverage can be financed along with the car itself. Before signing for a car loan, look into GAP insurance coverage. For a small cost it could end up saving you a tremendous amount of trouble.

About The Author: Sandy Gregor is a trial attorney at Allen, Allen, Allen & Allen. She currently practices out of the Fredericksburg office. Her areas of practice include automobile accidents, trucking accidents, product liability, and premise liability.

[1] See Auto Insurance Consumer’s Guide, prepared by Commonwealth of Virginia State Corporation Commission, Bureau of Insurance. (www.scc.virginia.gov/boi/). 

[2] See Id.

[3] See Gap Insurance Coverage, DMV.org (http://www.dmv.org/insurance/gap-insurance.php).

[4] See Id.

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