When Does Gap Insurance Not Pay?
With the price of cars increasing, the amount of money borrowed to purchase a vehicle is rising as well. As a result, many car owners are upside down on their vehicles, meaning they owe more than the car is worth.
Since your car insurer pays the actual cash value of your car in a loss, this can be problematic if your loan is more than that. As a decades-long insurance professional, I always recommend purchasing gap insurance if financing a car. Guaranteed Asset Protection (GAP) insurance pays for the difference between your car’s depreciated value and the amount left on your loan.
While it is a great safety net, there are scenarios where GAP insurance will not pay, however. It’s important to understand what these scenarios are so you can be prepared to pay out of pocket. Let’s break down when GAP insurance will not pay.
Key Takeaways
There are a few reasons why GAP insurance won’t pay out, including your car only being a partial loss, your policy is no longer active, or intentional or prior damage.
Your GAP claim can also be denied for certain reasons.
Most companies will limit your GAP insurance coverage to a specified percentage.
Insurance companies will deem your car a total loss if the cost to repair or replace is more than the car is worth.
Reasons GAP Insurance Won’t Pay Out
Below are the most common scenarios where GAP insurance will not pay out.
Car Is Not A Total Loss
The purpose of GAP insurance is to pay the difference between a car’s actual cash value and its loan amount. Therefore, it only applies to vehicles that are totaled, not for partial losses. If your car is not a total loss, GAP insurance would not come into play.
Policy Limits Are Exhausted
Most insurance companies that offer GAP coverage have a limit on the percentage or dollar amount they will cover. For example, some policies only cover up to 125% of the vehicle’s actual cash value. If your loan amount exceeds this limit, you may be responsible for paying the difference.
Non-Active Policy
GAP insurance will also not pay in scenarios where the loss occurred during a policy lapse. This means that the policy was not active at the time the accident happened, regardless of whether the insured or the company initiated the cancellation. Coverage may still apply if the policy is canceled after the loss, however.
Note: If a policy has been canceled for non-payment of premium, some companies allow a reinstatement without lapse. However, it’s important to let the insurer know of any losses that occurred during the time the policy was not in force as this can affect eligibility.
Intentional Damage
GAP insurance will not cover situations involving intentional damage or fraudulent activities. If a claims investigation determines that the damage to the vehicle was intentional or that fraudulent claims were made, no coverage will apply.
Note: Insurance companies take fraud very seriously. If an insured is found to have committed fraud, not only will the claim be denied, but most times, the policy will be canceled as well. This can make it difficult to find another insurance company in the future.
Prior Damage
Similar to most insurance policies, GAP insurance will not pay in scenarios where your car was damaged prior to adding the coverage or obtaining the policy. For example, if you purchased a vehicle and insured it without GAP coverage, you may be able to add it to your policy after an accident.
However, it would not pay for any damage that occurred prior to adding GAP.
Can GAP Insurance Deny A Claim?
GAP insurance will deny a claim when it meets any of the abovementioned reasons. In addition, a GAP insurance claim can be denied if the loss involves a policy exclusion, such as mechanical failure or wear and tear. A good rule of thumb is that if a standard auto policy will deny your claim, there’s a good chance GAP won’t apply either.
Consumers may also find their GAP claim denied if they were driving under the influence of alcohol. Not only does a DUI affect a potential claim payment, but it can affect the eligibility or price of your car insurance. In fact, drivers with a DUI violation can pay up to 84% more for their insurance than a driver without.
Does GAP Insurance Have A Claim Limit?
GAP insurance does not typically have a fixed claim limit in the same way that other types of insurance, such as liability or collision coverage, might. However, some companies may cap the amount they are willing to pay to a certain percentage. For example, some insurers offer GAP up to 25% of the vehicle’s actual cash value.
To ensure you understand the specifics of your coverage, it’s important to read your policy and contact your insurer with any questions.
How To File A GAP Insurance Claim?
Filing a GAP insurance claim involves the following steps:
Report Loss
Contact your insurance company via phone or email to report the claim. Remember that GAP insurance only applies if your vehicle is a total loss, so you may need to wait until it is determined to be totaled by the insurance company.
Contact GAP Insurance Company
If your GAP insurance provider differs from your insurance company, you should also contact them and report the loss.
Gather Documents
You may be required to submit documentation such as the original sales agreement, payment history, valuation report, or police report to your GAP insurer.
Submit Claim
Once you have reported the loss and obtained the required documents, your next step will be to submit the claim to the GAP insurer.
Receive Payment
After the insurance carrier reviews and approves your claim, payment is typically sent directly to your lender. The payment will be the difference between the amount your insurance company valued your car and the remaining balance on your loan.
How Do Insurance Companies Decide If Your Car Is Totaled?
LexisNexis states that 27% of all collision claims in 2023 were deemed total losses. But how do car insurance companies decide if a car is totaled? While it can depend on state regulations, it is also based on simple calculations.
Insurance companies will typically use either a total loss threshold or a total loss formula to determine if your car is a total loss. For states that use a threshold, it is based on the cost to repair against the state’s percentage of the car’s actual cash value. The threshold is usually a percentage between 70%-80%.
The states that use a total loss formula will determine if a car is totaled by using the following calculation:
Cost of Repair + Salvage Value ≥ Actual Cash Value
If the cost of repair and salvage is more than the car’s actual cash value, it will be deemed a total loss.
Note: To determine a car’s actual cash value, many insurers will use NADA. Some will use other databases taking into account a car’s year, make, model, mileage, and pre-loss condition to determine the value.
How Does GAP Insurance Work?
In order to purchase GAP insurance, you must have a loan on your car. You also need to purchase comprehensive and collision. This is because GAP insurance only comes into play when a car is totaled and its actual cash value is below the amount left to pay on your outstanding loan.
Regardless of whether you have GAP insurance through your car insurer or a separate company, the first step in getting paid for the gap between your vehicle’s value and the remainder of your loan is to file a claim with your auto insurance company.
Once your insurer deems your car a total loss, or if it’s stolen and not recovered, you will be able to file a claim for the GAP. As long as your actual cash value is lower than the amount owed on your car loan, GAP will cover the difference.
For example, suppose your car is totaled and has an actual cash value of $15,000. Your outstanding balance on your car loan is $25,000. Your insurance company will pay $15,000 for your vehicle and GAP insurance will cover the remaining $10,000.
Do You Need GAP Insurance?
While GAP is purchased in 39% of financed vehicles, a study completed by the University of Michigan in 2020 shows that more than 90% of consumers who purchased GAP insurance found it to be a good purchase and would buy it again.
I routinely recommend GAP insurance for anyone with a loan or lease on their car, but it makes the most sense for consumers who meet the following criteria:
- You owe more on your lease or loan than your car is worth
- You made a small down payment on your car (typically less than 20%)
- You rolled negative equity into your current car loan
- Your vehicle depreciates faster than other cars
- You cannot afford the cost to pay off your loan if your car is totaled
FAQs
Why did GAP not cover my car?
There may be a few reasons why GAP did not cover your car. Some of these reasons include non-payment of premium, violating your lease or loan agreement, or your car only being a partial loss and not totaled. To find the exact reason, you should contact your insurance company.
Will GAP insurance pay off my loan?
Yes, GAP insurance will pay off your loan balance if your vehicle is totaled and you owe more than your car is worth. It’s important to note that some GAP insurers will only pay up to a certain percentage so you should confirm with your insurance company.
How long does GAP take to pay out?
The time it takes for GAP insurance to pay out can depend on the specifics of the claim, your state, and your insurance company. Most claims take about 30-45 days to process on average.
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