Gap Insurance: Legal To Mandate?

In the US, gap insurance is typically offered by dealers to buyers of new vehicles and is designed to cover the difference between the cost of a vehicle and the value that would be ascribed to the vehicle by an insurer once it has been driven off the lot. While it is not unlawful for a dealer to automatically add a gap insurance line item to the sales contract, a customer is entitled to deny gap insurance. Dealers are not allowed to misrepresent what their gap insurance costs or what it will cover.

Customers can deny gap insurance

Dealers have some leeway in how they present the option to buy gap insurance to a customer. For example, it is not unlawful for a dealer to automatically add a gap insurance line item to the sales contract before discussing it with the buyer. When the buyer sits down to review and sign the contract, the dealer will explain the purpose and cost of gap insurance. Dealers may use tactics to nudge hesitant buyers into purchasing gap insurance, such as insisting that the contract will have to be redone if the buyer declines. However, unless the buyer specifically accepts the line item, it should not be included in the auto loan.

If a dealer forces a customer to buy gap insurance through threats or unreasonable language, or by refusing to sell the vehicle without it, the buyer is entitled to a refund of the gap insurance price. Additionally, dealers are not allowed to misrepresent the costs or coverage of their gap insurance policies.

Dealers cannot misrepresent gap insurance costs

However, misrepresenting the cost of gap insurance or what it covers is not allowed. Buyers should understand the terms of gap insurance before agreeing to purchase it. Some less scrupulous dealers may make misrepresentations or mischaracterize certain terms, such as the amount of coverage, especially if they sense that the buyer is tired or frustrated. If a dealer uses threats or unreasonable language, or refuses to sell the vehicle without gap insurance, the buyer is entitled to a refund of the gap insurance price.

It is important for buyers to understand that gap insurance is designed to cover the difference between the cost of a vehicle and the value that would be ascribed to it by an insurer once it is driven off the lot. This difference can be significant, as the value of a vehicle can depreciate quickly. Gap insurance can provide peace of mind, but buyers should carefully consider the cost and potential benefits to ensure it is a worthwhile purchase.

Gap insurance is rarely used

While gap insurance can be beneficial in certain situations, it is rarely used. This is because it is only applicable when a vehicle is totalled or stolen, and even then, it is only useful if the amount owed on the car loan exceeds the vehicle's value.

Gap insurance is optional car insurance coverage that bridges the financial gap for drivers whose car loan balance is higher than the value of their totalled or stolen vehicle. It is designed to cover the difference between the cost of a vehicle and the value ascribed to it by an insurer. For example, if a buyer finances a new car for $20,000 and gets into an accident that totals the car, gap insurance would ideally cover the difference between the insurer's assessed replacement value and the original cost.

However, gap insurance is rarely used because it is only relevant in specific circumstances. Firstly, it is only applicable if the vehicle is totalled or stolen, which may not be a common occurrence for many drivers. Additionally, gap insurance is only useful if the amount owed on the car loan is higher than the vehicle's value, which may not be the case for all drivers. Over time, as the loan balance decreases and the vehicle depreciates, the need for gap insurance diminishes.

Furthermore, gap insurance may not be necessary if the driver has sufficient savings to cover the difference between the insurance payout and the loan balance. In such cases, the cost of gap insurance may be seen as an unnecessary expense.

While gap insurance provides peace of mind, buyers should carefully consider their individual circumstances before purchasing it. It is important to weigh the potential benefits against the cost to ensure that it is a worthwhile investment.

Dealers cannot force customers to purchase gap insurance

However, dealers are not allowed to misrepresent the costs or coverage of their gap insurance policies. Buyers should understand these terms before agreeing to purchase gap insurance. If a dealer forces a customer to purchase gap insurance through threats or unreasonable language, or by refusing to sell the vehicle without it, the buyer is entitled to a refund of the gap insurance price.

Customers can cancel gap insurance

To cancel your gap insurance, you'll need to contact your insurer, who will provide you with a form to fill out. You can also submit a written request, which should include your name, address, and vehicle identification number (VIN). If you've purchased gap insurance through an insurance company, you may be able to cancel online. Keep in mind that if you've bought gap insurance from a dealership and the cost is rolled into your car loan, you might not be able to cancel it.

When cancelling your gap insurance, be sure to have all the necessary information and documents ready. This includes proof that your car has been sold, traded, or that your loan has been paid in full, as well as verification of your car's current mileage. If you've paid off your loan, you may also need to provide a copy of the payoff letter. It's important to note that you should not cancel your gap insurance until the sale is complete if you're selling or trading your car.

After submitting your cancellation request, your insurance company will process it, and you will receive a refund for the unused portion of your coverage, minus any applicable termination fees. The refund process can vary in duration, so it's a good idea to contact your insurance provider for more specific information. Remember to keep all documentation related to your policy, cancellation, and refund for your records.

Frequently asked questions