Huge Uptick In Storm-Related Auto Destruction Highlights Gap Coverage On Leases and Loans

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A little-noticed added insurance policy may mean the difference between owing thousands on a storm-totaled car or not.

Image credit: Mercedes Benz

With so many storm and flood-damaged cars being totaled by insurance companies over the past month, and possibly more to come, the spotlight is now on insurance coverage. For those who lease or have a car loan, a small detail handled during the initial financing and insuring of that vehicle may mean the difference between walking away with no financial hit, or being stuck with thousands in payments due on a car one no longer owns.

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When a vehicle is first sold new, it has an immediate devaluation of thousands of dollars. It makes sense. Who would pay full price for a vehicle that another person has owned for even a few days or weeks? In the first year, the value can drop by as much as 30% according to Black Book, the vehicle valuation experts. The problem for owners is that they may owe the full amount on that vehicle, but car insurance only covers the actual value of the vehicle. The way that situation is managed is with gap insurance.

Gap insurance covers the difference between the outstanding payments due on a vehicle and what the insurance will cover. Gap insurance is usually purchased by a lessee during that confusing time after you agree to lease a car, and the moment you sign on the dotted line and are handed the keys. The good news for many who lease is that this insurance is usually a standard part of a lease contract on a new vehicle.  The cost is often shown on the leasing agreement in the “Tax and Gap” section. The insurance is also called “lease insurance” in some cases. Most who lease simply sign and forget about this added protection. Until their car is totaled.

When purchasing a new car, gap insurance coverage is not a standard cost added to the new car by the dealer. Many dealers do offer to sell it, and they sell it for a hefty fee according to most sources. More often, gap coverage can be cost-effectively added to a new vehicle’s insurance policy. When added this way, it usually covers just the first year of the loan. That is the critical gap time period since the first year has the most depreciation and payments have not yet begun to pay off the car significantly. Liberty Mutual Insurance calls this coverage “New Car Replacement Coverage.”

For gamblers who want to bet that they might well total a car, Liberty Mutual will also sell “Better Car Replacement” insurance, which will not just cover the cost to replace the car, but will pay more than that, allowing the policyholder to get a one-year newer car.