Author: David Thompson and Mike Edwards

Owing more than the car is worth is often referred to as “being 'upside down' in the loan or lease.” For insureds, still owing money after a car that has been totaled is extremely frustrating. Fortunately, there are endorsements available in both Personal Auto and Commercial Auto that solve the problem.

Fortunately, there is a relatively simple solution. Both the Personal Auto Policy (PAP) and Business Auto Policy (BAP) have endorsements available to provide a remedy for this coverage dilemma. The endorsement is referred to as “Gap” coverage because it “fills the gap” between the amounts owed on a loan and the actual cash value (ACV) settlement paid by the insurance company for a total loss vehicle.

Under the PAP, the endorsement is PP 03 35 09 93 -- Auto Loan/Lease Coverage.  Under the BAP, the endorsement is CA 20 71 10 01 -- Auto Loan/Lease Gap Coverage.  It should be noted that many car dealers may make similar coverage available to their customers and various web sites offer it on a direct basis. The advantage of the insurance agency offering the coverage is that it places them (as well as the company) in a positive light come claim time. Should the vehicle owner have a separate Gap policy they would be faced with the problem of filing two separate claims, one under the PAP/BAP and one under the Gap policy. Having one policy makes claim settlement easier. In addition, the cost of the endorsement may be significantly less than that charged byother sources.

Both the  PP 03 35 and  CA 20 71 contain substantially identical language. Shown below is language from the  PP 03 35:

In the event of a covered total loss to a "your covered auto" shown in the Schedule or in the Declarations for which a specific premium charge indicates that Auto Loan/Lease Coverage applies, we will pay any unpaid amount due on the lease or loan for "your covered auto" less:

1. The amount paid under Part D of the policy; and

2. Any:

a. Overdue lease/loan payments at the time of
   the loss;

b. Financial penalties imposed under a lease
   for excessive use, abnormal wear and tear
   or high mileage;

c. Security deposits not refunded by a lessor;

d. Costs for extended warranties, Credit Life
   insurance, Health, Accident or Disability
   insurance purchased with the loan or lease;
   and

e. Carry-over balances from previous loans or
   leases.

In simple terms, adding the Gap endorsement provides payment for the difference in what the client owes the bank and what the insurance company pays as ACV of the auto. Some of the “add on” coverages purchased by the owner such as extended warranty or credit life insurance would not be covered by the endorsement, nor would any overdue loan or lease payments.

The cost to add the endorsement is small. The loss costs for the BAP is 7% of the physical damage coverage while under the PAP the loss cost is only 2% of the physical damage coverage. (Premiums will vary by company and state.) Note, too, that the endorsement is available for use when a vehicle is either financed or leased. Paying off the terms of a lease could be a significant cost for some clients who have entered into a long-term auto lease situation.

Clearly, insureds who purchase or lease cars could face a very nasty surprise should they ever face a total loss. It would therefore be very important to offer this coverage to all insureds who purchase or lease new cars today.

Agents don't always know when their customers car shop. Here's a link to an article that you can use to alert your customers to their need for gap insurance and why they should consider you first for their gap coverage. 

Updated: September 17, 2024

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