Does Gap Insurance Affect My Car Accident Settlement?

July 18, 2022

Gap (Guaranteed Asset Protection) insurance is an excellent investment to buffer you against the impacts of inflation. But it doesn’t affect your car accident settlement.

A new vehicle will instantly diminish in value once you drive it off the lot. But if you financed it with a car loan, your loan balance won’t decline accordingly. If you crash and your insurer declares it a total loss, collision coverage will clear the vehicle’s current estimated value – usually lower than the amount you owe on your loan.

Gap insurance fixes the disparity between what you owe and what your policy pays out, preventing you from continuing loan payments for a vehicle in the junkyard. Moreover, some auto loan agencies and leasing firms require this coverage.

What is Gap Car Insurance?

Guaranteed Asset Protection is an auto insurance coverage that comes through by paying your car loan balance when it’s stolen or totaled. It shields you from paying loans for a car that is no longer in your possession.

You may be wondering what’s the importance of gap insurance if you have collision and comprehensive coverage. Under these two policies, your insurer will pay your vehicle’s actual fair market or cash value within the policy limits. Fair market value accounts for depreciation, so what you’ll get from the insurance company will be less than your auto loan’s value.

Gap insurance prevents you from covering the cost out of pocket. It’s helpful if you:

  • Leased your vehicle
  • Put below 20% down on it
  • Placed negative equity from your previous vehicle loan into the new one
  • Acquired a loan that goes beyond five years
  • Purchased a vehicle whose value declines faster than other vehicles

Generally, gap insurance doesn’t affect your car accident settlement. But how does it work?

How Gap Insurance Works

Vehicles lose up to 60 percent of their original value within the first five years, and depreciation continues yearly.

For example, assuming you were involved in an accident that totaled your car and has an outstanding loan of $15,000. However, your insurer decides that the vehicle’s fair market value is $5,000, sending $4,000 to your lender (less the deductible), leaving you with an $11,000 loan balance to clear.

Without gap insurance, you must pay off the rest of the amount. But if you have one, your insurer will pay a settlement for the car’s actual value without the deductible, total the gap coverage amount, then send the final check. In our example, this will be $10,000.

What Gap Insurance Covers and Doesn’t Cover

Gap insurance covers your car’s negative equity, the difference between your loan balance and its actual cash value. Like other insurance products, it has its maximum benefit limits, so make comparisons when shopping around.

This coverage only extends to your vehicle, not other property or people, and only applies when the insurer considers your car totaled or stolen. It’s only relevant for auto loans taken to acquire the covered vehicle, so it’s not an option if you used other forms of funding like a home equity loan.

All these limits mean that gap insurance cannot cover:

  • Bodily injuries, costs of treatment, funeral expenses, or lost wages
  • Items rolled into the car loan, including loan rollover balances, extended warranties, late penalties, and credit life insurance
  • Delayed loan payments due to financial setbacks
  • Vehicle repairs
  • A new car’s down payment
  • Car rentals while the car isn’t in your hands

Gap insurance pays out provided you have a valid total loss claim, and your car insurance coverage is in effect. But if you missed payments, the amount will be deducted. From our example, if you delayed paying $400, your final gap insurance payout will be $9,600.

The insurance may also fail to pay out if the claim for the stolen or totaled vehicle is denied. It won’t also come into play if the coverage lapsed.

Does Gap Insurance Pay Deductibles?

The answer to this question will depend on your gap insurance policy because some policies pay for it while some don’t. When the policy pays the primary deductible amount, this amount won’t be reimbursed back to you. Instead, it’ll be taken from your totaled vehicle payout and covered as a component of your outstanding loan balance that gap insurance pays.

Accident Compensation Won’t Fill the Gap

Gap insurance is still essential even if the at-fault party’s insurance provider will pay for your totaled car. You can’t count on them to pay out the outstanding amount because they’ll also, at most, only compensate for your totaled vehicle’s current value without factoring in depreciation. But what if you were also injured and expecting fair compensation for the physical harm?

Realistically, there could be little left to compensate for the difference between the initial purchase value of the car and its current value after depreciation after handling the cost of medical care. Furthermore, you may have to wait before receiving the remuneration, especially if your case fails to settle and ends up in trial. Also, the other party’s insurer may challenge the amount you claim to represent the vehicle’s damage.

Ultimately, this can leave you with an even larger gap to pay out of pocket if you don’t have gap insurance. So never rely on accident compensation to clear your loan balance.

Discuss Your Gap Insurance with A Qualified Car Accident Attorney

Seeking compensation for your totaled car from the at-fault party or insurance company can be difficult. Even if you finally get a settlement based on the car’s current value, you may be forced to pay for your outstanding car loan balance out of pocket.

Your best chance of getting a fair settlement to address the financial implications of the accident is to involve an experienced attorney from David Aylor Law Offices. The lawyer can evaluate your case for free and use their experience and knowledge to fight for a fair settlement. So don’t hesitate to reach out today.

Frequently Asked Questions On Gap Insurance

Is gap insurance worth it?

Gap insurance comes through if you have a massive difference between your vehicle’s ACV and car loan balance. But if you’ve bought a used vehicle or paid it off, it might not be worth it.

Can you get gap insurance after purchasing a car?

You can add the insurance to your new acquisition at a dealership because it is an optional policy add-on. However, including it in your policy is sometimes more economical than going through your dealership.

What is a total loss?

An insurance company will consider your vehicle a total loss if the cost of repairing it after an accident is behind a certain percentage of its actual worth. The insurer will determine whether your car meets the threshold, and you’ll typically submit it to them.

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