What is Gap Insurance?
Insurance coverage that pays the difference between a vehicle's actual cash value and the outstanding balance on the owner's auto loan or lease if the vehicle is totaled.
Understanding Gap Insurance
Gap insurance is particularly important for new vehicles that depreciate quickly. If your car is totaled in an accident and you owe $25,000 on your loan but the car is only worth $18,000, gap insurance covers the $7,000 difference. Without gap insurance, you would be responsible for paying the remaining loan balance out of pocket.
Examples
- 1New car totaled six months after purchase with negative equity
- 2Leased vehicle declared total loss with remaining lease payments
- 3Gap policy covering $8,000 difference between value and loan balance
Related Terms
Total Loss
When a vehicle is damaged to the extent that the cost of repairs exceeds the vehicle's actual cash value, or when the vehicle cannot be safely repaired.
Total Loss Threshold
The percentage of a vehicle's actual cash value at which the cost of repair causes the insurance company to declare the vehicle a total loss rather than repairing it.
Diminished Value
The reduction in a vehicle's market value after it has been damaged in an accident and repaired, compared to a similar vehicle that was never damaged.
Reservation of Rights
A formal notice from an insurance company informing the policyholder that while they will investigate or defend a claim, they reserve the right to deny coverage or limit their obligations later.
First-Party Claim
An insurance claim filed by a policyholder against their own insurance company for losses covered under their policy.
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