What is GAP Insurance? –
GAP Insurance stands for “Guaranteed Asset Protection.” The purpose of GAP insurance is to make up for any shortcoming in regular automobile insurance.
Shortcomings occur because there is often a difference between the amount that an insurance company will insure a vehicle for and the amount that is owed on the loan for that same vehicle. Automobile insurance provides compensation for a vehicle if it is damaged (this is usually called “comprehensive” insurance). If the vehicle’s damage doesn’t exceed roughly 75% of the vehicle’s total value, then automobile insurance will pay for the repairs to that vehicle. This situation arguably puts the vehicle owner in the same position that she would have been in had the damage-causing accident not taken place.
If the vehicle’s damage, exceeds 75% of its value, however, the insurance company may elect to “total” the vehicle. When this happens, the insurance contract typically has language that limits the insurer’s responsibility to payment of the “market value” of the vehicle. Under Washington law, this is measured by determining what it will cost the vehicle’s owner to replace the “totaled” vehicle by purchasing a substantially similar one on the open market. A process, like the one used in determining the value of a house, is then undertaken whereby “comparable” vehicles that are for sale are looked at to provide a basis for valuing the wrecked car.
The problem that then faces many vehicle owners is that their vehicle no longer has the same value it did when it was purchased, and the owner owes more to the bank than what they are receiving in compensation for their totaled vehicle. GAP insurance is designed to pay the vehicle owner any difference between what their standard auto insurance paid out and what is owed on the loan.