Gap insurance is a specific type of automobile insurance. Its purpose is to help a borrower pay for the “gap”, or difference, between what is owed on a vehicle and the actual market value of the car in the event that the car gets totaled.

There are two major ways that a person can obtain gap insurance. The first is to purchase gap coverage directly from an insurance broker. The second is through a “gap waiver” agreement sold by finance managers. The gap coverage is generally finalized at the time of the car sale at the dealership.

The car’s value at the time it was totaled is determined by a neutral third-party appraiser. Gap waiver processes are not subject to clear regulation, which can sometimes cause problems for borrowers and car owners. Actual coverage, interest rates, and fees will vary according to lender policies and contracts.

How Does Gap Insurance Work?

Regular collision insurance usually only covers up to the fair market value of the car, and will not help the borrower pay anything they might still owe on a car loan. This is where the gap loan steps in.

For instance, assume that you had a $20,000 loan on your car. Suppose your car was totaled, and its value at the time was $17,000. Collision insurance might cover the $17,000; however, this means you would still owe $3,000 on the loan. With gap insurance, the actual total payoff would be $20,000, and so the borrower would not owe anything anymore on the loan. The gap coverage would make up whatever the difference in value and the loan was (in this case, the $3,000).

What Are Some Legal Issues Associated with Gap Insurance Policies?

Gap insurance policies are associated with some very distinct legal issues. This is especially true for unregulated gap waivers that are issued through car dealers. Some conflicts include:

  • Disputes over the value from the appraisal
  • Issues regarding the accountability and certification of persons issuing gap insurance policies
  • Insurance fraud claims
  • Various terms embedded in the small print of the policy

Generally, the most common disputes involve conflicts over the amount due after an accident in which the car is wrecked. These may sometimes require a lawsuit for damages to reimburse the non-breaching party. In some cases, there have been class action lawsuits filed due to policies that affected a large number of loan consumers.

Do I Need a Lawyer for Help with Gap Insurance?

Gap insurance can sometimes be complicated. Also, state laws governing gap insurance may vary from state to state. You may wish to hire a personal injury lawyer if you need help with gap insurance or any other types of automobile insurance issues. Your attorney can help research the laws near you to determine what your legal rights are. If you have a legal dispute and need to file a lawsuit, your lawyer can provide you with representation during court proceedings.