Hope you avoid falling into a painful coverage gap

June 19, 2013

Loan/lease coverage ensures your new vehicle gets paid off in the event of a total loss.

   POSTAGE  by Rob Stamp

Ask anyone who’s been told their car has been declared a total loss and they’ll probably be able to cite a lengthy list of frustration at every step of the process. First of all, it likely means they’ve been involved in an accident and that, my friends, is never a good thing. Taking time out of the typical busy schedule to get an estimate or provide statements to adjusters is an inconvenience most can do without. And, almost without fail, you learn that your precious car is worth a lot less to the insurance company than it is to you.

Most insurance companies settle physical damage claims based on the car’s actual cash value at the time of loss. That means, typically, that if the cost for repairs exceeds the current value of the vehicle, the insurance company will consider it a total loss and end up paying what the car was worth, minus any applicable comprehensive or collision deductible. What a person absolutely does not want to hear is that the settlement leaves them well short of what they still owe on a car they no longer own. Some car owners, particularly those driving brand new vehicles they didn’t make much of a down payment on, find themselves “upside down,” which means they owe more toward the loan than their car is valued at. The rapid depreciation a new vehicle takes the minute it gets driven off a dealer’s lot puts drivers at risk right away of getting screwed.

Unless you are financially well off and pay cash for your vehicles, carry little balance on a car loan or pay them off right away, the best way to protect yourself against the dreaded pineapple upside down loan is to purchase optional loan/lease coverage, often called gap coverage. With gap coverage, the bank gets its money regardless of the car’s actual cash value when declared a total loss. Gap coverage is often offered as part of the car loan, but, believe me, it’s a lot cheaper when you add it to your auto policy. Of course, it wouldn’t be very insurance-like if it didn’t come with the usual terms, conditions and exclusions, so you’ll want to check into it closer with your agent, then familiarize yourself with the actual policy form when the coverage gets added.

More and more carriers today are now offering some sort of new vehicle replacement coverage you may consider in lieu of gap coverage. Because that varies from company to company, your agent would be the best person to identify what those options are and help determine which would be the best way to cover your ass new ride.