Does Gap Coverage Pay if Insurance Denies the Claim?

If your car is totaled, gap insurance can help with the loan payoff.
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If you want security for a car loan, guaranteed asset protection, or "gap," insurance pays the loan in full if the vehicle is a total loss and the insurance payment doesn't cover the loan balance. Dealers usually offer gap insurance on new or leased cars. If your regular insurance company denies the damage claim, however, gap insurance won't be able to help you.

Gap Insurance Concepts

Gap insurance offers you financial security if your financed car is in a serious accident or is stolen. By the terms of a gap policy, the insurance company that covers your car for property damage and liability must decide the vehicle is a total loss. If the insurance reimbursement doesn't match the outstanding loan amount on the car, you're still on the hook for the loan balance. The lender won't write off this debt, but gap insurance exists to do just that.

Exclusions From Gap Coverage

Gap insurance may exclude some portion of your obligation to the primary lender. The policy may not reimburse past-due payments on the loan, for example, or outstanding penalties and interest charged by the lender. Terms vary; some gap policies will also pay any deductible amounts. If the lender has allowed you to roll the cost of warranties and vehicle extras into the loan, however, you may find yourself responsible for those costs. Also, the single premium you paid for the gap coverage itself may be excluded if the loan amount includes that payment.

Denied Claims

If the worst happens and the insurance company denies your claim for damage to the car, gap coverage will not cover the outstanding loan amount, or the balance of the contract on a leased car. The insurance company must declare the vehicle a total loss and approve your claim before the gap coverage goes into effect. Gap insurance protects your financial obligation in the event of a total loss, which is decided by the primary insurer. Some gap policies require you to have comprehensive and collision insurance in effect at all times. Others will cover the loan or contract balance even if you have no insurance in effect; but driving without primary insurance is illegal and can make you personally liable for someone else's medical bills and property damage.

Other Gap Considerations

The less equity you have in your car, the more important gap coverage becomes. If your loan balance is relatively low, the primary insurance payment is likely to cover the debt in full if the car is totaled. To protect themselves against a big loss, car dealers who are leasing a vehicle will often require gap coverage, which will reimburse them for the loss they would otherwise take on the leasing contract. If gap coverage isn't part of the lease, it might have a gap "waiver." This releases you from any liability for the coverage gap if the car is damaged beyond repair.

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