Gap insurance is an optional coverage which may be offered by your car dealer or by your automobile insurance company. Gap insurance helps protect you when your vehicle becomes a total loss from an accident and the amount you owe is more than the actual value of your vehicle. In South Carolina, a vehicle is generally determined to be a total loss if the cost of parts and labor for repair are 75% or more of the vehicle’s fair market value. Once a vehicle is deemed a total loss, the standard liability and collision auto insurance policies are only going to pay the fair market value of the vehicle. However, the amount owed on a loan or lease for the vehicle may be greater than the fair market value due to a few factors. First, vehicles generally depreciate due to time and use. The faster a vehicle depreciates, the more likely that the amount owed on the loan or lease will exceed the fair market value. Second, sometimes people pay more than the fair market value of a vehicle. Third, the financing of the loan or lease can cause or attribute to the amount of the outstanding loan being greater than the fair market value of the vehicle at the time it becomes a total loss.
So, what happens when you have been in an accident and the amount owed is greater than the fair market value that the insurance company pays under a liability or collision policy? If you have the money, you can simply pay off the difference. For many people, this is not an option. If you’re extremely lucky, your loan company will simply agree to consider the loan satisfied by the payment of the fair market value. This is not very likely. Another option is to see if you can roll over the outstanding amount into the loan for a new car. This will depend on the lender’s willingness to roll over the outstanding amount and is most often an expensive financing option. Gap insurance helps protect you from being in a position of having to figure out what to do. Gap insurance is purchased to cover the difference of a vehicle’s fair market value when it becomes a total loss so that you can cover the amount that is owed on the vehicle. For instance, take a scenario where you paid $33,000.00 for a vehicle and now owe $28,500.00. You are in an accident and your car is deemed a total loss with a fair market value of $24,750.00. At this point, you will owe $3,750.00 to the finance company. If you have gap insurance, the gap insurance should pay the remaining $3,750.00.
Some lenders may require gap coverage, but even if they don’t, you should consider purchasing it for your own protection. Gap insurance should be a comparatively cheap add-on to your auto insurance policy. If you are in the process of purchasing or leasing a new car, it is worth a simple call to your carrier to get an idea of the cost of gap insurance. If you have any questions about gap insurance or auto accident related matter, please do not hesitate to contact Smith & Jones Law, LLC.