Gap Insurance - Buyer Beware

Gap insurance is sold by automobile insurers to "protect" you if you car is lost or destroyed and it turns out that the value of your car is less than what you owe on your car loan.  Sounds like a good idea on its face?  But consider:

          (1) Why are you buying a car that is worth less than the balance of the car loan?

          (2) What profit does the dealership make on this gap insurance?

          (3) How do you make a claim years after you bought your car?

My clients who have purchased gap insurance usually have no idea how and where to make a claim.  The dealership who sold the insurance rarely takes steps to make sure you know how to file a claim.  Unlike automobile insurance, gap insurance involves paperwork once, only at the time of sale.  There are no renewal documents or agent to contact.  You can easily forget how to file or even that you have gap insurance.

Gap insurance is called, "gap waiver" because automobile insurers are not licensed to sell insurance.  However, it seems clear that this product is insurance.  Car dealerships seem to pay approximately $60.00 to $100.00 for insurance which is typically re-sold for between $300.00 and $500.00 to the unwitting consumer.

One dealership sold my client a car for double its worth.  The gap insurance contained an exclusion which said they wouldn't pay the full gap under those circumstances.  Guess who sold the car and the insurance?  It was the same entity.  There was no one to make sure that the insurance product being sold was reasonably needed or effective.

In that case, we filed suit against the dealership and the insurer.  The insurer and dealership ended up paying 100% of the loan balance plus about $15,000.

The bottom line is that gap insurance is overpriced and usually not needed.  It you buy a car, you shouldn't pay substantially more than what it's worth.

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