What is Gap Insurance?
There is an old saying that if you buy a new car, the second you drive the car off the lot, it is no longer worth what you paid for it. So what happens if you get in a car wreck and you owe more than what the car is worth?
If your vehicle is totaled in a motor vehicle accident, insurance companies are only obligated to pay you the “fair market value” of your vehicle. It does not matter how much you owe a lender or a lienholder. If the “fair market value” (what the car is worth) is less than the amount you owe, you are still on the hook for payment of the difference.
If you buy a new car or find yourself in a position where you vehicle is not worth the amount you owe on the vehicle, consider purchasing “Gap Insurance.” Gap insurance is a type of policy that will pay for the difference between a vehicle’s actual cash value and the amount the driver still owes on the vehicle. There can often be a significant difference between these two amounts. Generally, the price for gap insurance is rather low, and can provide peace of mind for the coverage it provides. You can buy gap insurance a through your car dealer, your lender, or your auto insurance company.
Here is an example of how gap insurance works:
If you purchase a car for $20,000, and its value drops to $16,000 after a few months. If your vehicle is totaled in a car accident, the property damage adjuster for the insurance company handling your claim will only offer to pay the fair market value of the vehicle ($16,000). Without gap insurance, you will be stuck having to pay the difference between the actual value of $16,000 and the amount of your note. So you would be on the hook for that $4,000 out of your own pocket.
As Texas personal injury attorneys, we handle car wreck cases across Texas. As car wreck lawyers, we often hear from drivers who decided not to purchase gap insurance. And unfortunately, we have to give many people the bad news that the law only requires insurance companies to pay the actual cash value of a totaled vehicle, not the amount a driver actually owes on the vehicle. Drivers who are making payments on their vehicle or are leasing a vehicle should be proactive and protect themselves by asking an insurance agent about gap insurance.