When Does Gap Insurance Not Pay?

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Written by Mandy Sleight Edited by Lequita Westbrooks

Updated February 21, 2024

Gap insurance is optional coverage that can pay off your car loan or lease if your vehicle is stolen or totaled and you owe more than the car is worth. It doesn’t cover damage to your vehicle or someone else’s property, injuries, negative equity, extended warranty coverage, missed car payments, routine maintenance, or your deductible.

You can purchase gap coverage from the dealer, your lender, or your insurance company — so when shopping for car insurance, ask if they offer it. Keep reading to learn how gap insurance works, including situations where gap insurance doesn’t pay, how to file a gap claim, and how insurers determine whether your vehicle is totaled.

How Does Gap Insurance Work?

Guaranteed asset protection insurance, or gap insurance, is an optional coverage you can purchase if you have a car loan or lease. If your vehicle gets totaled and you owe your lender more than the car’s actual cash value (ACV), gap insurance can cover the difference.

For example, let’s say you owe $20,000, and after being stolen, your car is valued at $15,000. If you have gap insurance — sometimes called loan/lease payoff coverage — it pays the $5,000 difference to your lender. If you don’t, then you’ll have to pay $5,000 out of pocket to close out your loan. Your financial responsibility to pay off the loan or lease doesn’t end, even if you no longer have the vehicle.

Although gap insurance policies are typically optional, it’s usually a requirement for a leased vehicle. It may be automatically included in your lease agreement or something you need to get on your own. The dealership or lender might offer it, but it could be cheaper if you get gap coverage through your car insurance company.

Check the fine print of your lease agreement for a “gap waiver” charge to see if it’s included.

7 Situations When Gap Insurance Doesn’t Pay

Unfortunately, gap insurance doesn’t pay in all situations. Here are seven scenarios gap insurance won’t cover.

Accident damage and bodily injuries

If you get into an accident, gap insurance won’t pay for damages, no matter who’s at fault. That includes your and your passenger’s injuries, the other driver’s and their passengers’ injuries, your vehicle, and their property damage.

Negative equity

Some people buy a new car but still owe money on their previous vehicle loan. If you rollover money from a prior loan or lease, the gap insurance likely won’t cover the negative equity.

Extended warranty and other optional coverages

If you purchase optional coverages, like maintenance or extended warranty coverage, they’re usually included in your original loan balance. Gap policies typically only cover the car loan balance but won’t pay for the optional coverages rolled into the loan amount.

Missed car payments

Disability, death, injury, or unemployment may cause you to get behind on your monthly payments. If this happens and your vehicle gets totaled, gap insurance may not cover the missed payments or fees you incur.

Routine maintenance

A standard car insurance policy doesn’t cover routine maintenance or normal wear and tear on your car. Neither will your gap insurance company. Mechanical failure isn’t covered either, though some insurance companies offer optional coverage for mechanical breakdowns that might cover it.

Your comprehensive or collision deductible

Depending on the type of car accident you get into, you may need to use your comprehensive or collision coverage. Both coverages typically have a deductible — the amount you pay toward fixing or replacing your vehicle.

Gap insurance doesn’t cover your comprehensive or collision insurance deductible.

The vehicle’s diminished value

If you get into an accident that damages your car but it’s not totaled, it can significantly diminish your vehicle’s fair market value. If your car is totaled in an accident later, you might get less than the vehicle’s ACV. Gap insurance typically won’t cover the extra amount you didn’t receive because of the car’s diminished value.

Do You Need Gap Insurance?

It might be a good idea to buy gap insurance if you:

• Financed your new vehicle for 60 months or longer
• Leased a car and it’s required
• Made a down payment of 20% or less on a car
• Purchased a car that depreciates faster than other vehicles

How to File a Gap Insurance Claim

Depending on where you purchase your gap insurance, you can file a gap insurance claim online, over the phone, or in person. You’ll need several documents to prove the difference between your vehicle’s ACV at the time of the accident and the outstanding balance of your loan, which may include:

• A police report detailing the accident specifics and date of loss
• Loan or lease finance agreement showing the financing terms
• The original MSRP, factory invoice, or sales agreement showing the car’s purchase price
• Loan history detailing the loan payments you’ve made and the outstanding loan balance
• The insurance settlement statement showing the car’s ACV and the amount the insurance is covering.
• A copy of the settlement check showing the amount paid to the finance company

The claims process might be easier if you purchased gap insurance through your auto insurance company, especially if it handled your totaled vehicle claim.

How Do Insurance Companies Decide If Your Car Is Totaled?

In general, when the cost of repairs is more than what your vehicle is worth, your insurance company will declare it totaled. Companies determine this by using something called a “total loss threshold,” which differs by state. Insurance companies use two methods to determine this threshold.

• Simple percentage threshold: Most states use this method, which declares the car totaled once the repair costs reach a certain percentage of the vehicle’s value. The amount is usually 70% to 75%, though some go as low as 60% and some as high as 100%.
• Total loss formula (TLF): The TLF is a calculation of the vehicle’s salvage value (how much it would sell for in its damaged condition) and the repair costs compared to its actual cash value. For example, if the vehicle’s salvage value is $800 and repair costs are $8,000, but the actual cash value is $10,000, it isn’t a total loss. But if the repair costs were $9,500, it would be considered totaled.

Gap Insurance FAQs

Gap insurance provides financial protection if you finance or lease your vehicle. We answered some of the most common questions about this optional coverage to help you determine if you need it.

Can gap insurance deny a claim?

Yes, gap insurance may deny a claim for several reasons. The most common reasons for claims denials include not having the proper documentation, not making the agreed loan payments, filing a claim for negative equity, normal maintenance or repairs, and getting into an accident where your car isn’t totaled.

Does gap insurance have a claim limit?

It’s possible. Your gap insurance policy may have a claim limit depending on your coverage and where you purchase it. For example, loan/lease payoff coverage from Progressive will only pay up to 25% of the car’s value. It’s a good idea to compare gap insurance coverage options to know what limitations there might be.

Does gap insurance always pay the difference?

No, gap insurance doesn’t pay in all cases. For instance, if you rolled over negative equity, missed loan payments, or had excess charges or fees rolled into your loan or lease, your gap insurance may not pay the full difference.

Does gap insurance pay off loans?

Gap insurance pays off your auto loan balance if your vehicle gets totaled and you owe more than your car is worth. It might not pay the full amount if you rolled over a prior auto loan balance, which is called negative equity. Take a closer look at your gap insurance policy to understand what it does and doesn’t cover.

Do you need gap insurance?

Not all drivers need gap insurance. But if you took out a loan of 60 months or more, only made a small down payment, leased a vehicle, or purchased a car that depreciates fast, gap coverage may be worth it.

Sources

1. Insurance Information Institute, “Insuring a leased car,” Accessed February 13, 2024.
2. Insurance Information Institute, “What is gap insurance?,” Accessed February 13, 2024.

Mandy Sleight Auto Insurance Writer

Mandy Sleight has over 15 years of insurance knowledge and expertise in auto, home, life, health, pet, supplemental benefits, and other insurance products. She is a sought-after insurance expert, appearing in Bankrate.com, Moneygeek.com, U.S. News & World Report, Reviews.com, CNET, and other publications. She uses her background and experience working for well-known insurance companies like State Farm and Nationwide Insurance to create engaging and easy-to-understand content to help readers make smarter insurance choices that have a positive effect on their budgets and finances.