What is Gap Insurance?

ou have collision and comprehensive insurance for your company cars so you’ve covered if there is an accident, right? Well, maybe.

If you buy a company car, van, or truck and it gets totaled in an accident, you may still end up owing money to the bank on your car loan. Standard car insurance may not be enough to take care of this.

Why You Might Owe Money

Your insurance will pay you the actual cash value, termed ACV, which refers to the fair market value of your vehicle at the point just prior to when it was totaled. But the market value may be less than what you still owe on your loan.

Many car loans these days are for extended periods, even up to 96 months. As the vehicle depreciates in value, its ACV goes down. In addition, the deductible on your collision insurance will be deducted from the ACV.

Here’s a look at the numbers Bankrate.com illustrates to see how this plays out.

  • You owe $25,000 on the loan for your company vehicle.
  • Its ACV is $18,000.
  • Your insurance has a deductible of $1,000.
  • Your van is totaled in an accident.
  • The insurer gives you a check for $17,000, which is ACV minus deductible, or $18,000 — $1,000 = $17,000.

The money actually would go to the bank, in most cases, because you have financed it through them. Or the check from the insurer might make a short stop in your possession. They might make it out to you, and then you need to sign it over to the bank.

Either way, you owe the bank $8,000 for the rest of the loan. You need to pay this out of your company funds.

Gap Insurance to the Rescue

One way around this scenario is to buy gap insurance, which was specifically created to pay the difference between what you owe and the ACV, in case of an accident. Many gap policies also cover the deductible.

But it’s not a total solution. Even with gap insurance, you won’t get money from the insurer to buy a new company vehicle. It pays you the value of the car just prior to the accident, but it doesn’t buy you another car. The only way to solve that problem is to pay the vehicle off as soon as possible so you own it outright.

Gap insurance prevents the frustrating scenario of having to keep paying the bank for a car that has long been towed to the scrap yard.