Most commercial auto policies do not provide physical damage coverage on a replacement cost basis. Instead, coverage is typically written on an Actual Cash Value basis, which adjusts for depreciation and condition of the vehicle at the time of loss. Consequently, many people find themselves in the unenviable position of still owing out‐of‐pocket on the remaining balance left on the loan or lease, after a total loss settlement has been made by the insurer. One way to avoid this unpleasant circumstance is to purchase Loan/Lease Gap Coverage from your commercial auto insurance carrier. This type of coverage provides limits in excess of the actual cash value of the vehicle.
Loan Gap Coverage
Once you purchase a new vehicle, it immediately begins depreciating in value. Sometimes, the rate of depreciation is faster than you are paying off the loan. In the event of a total loss or if the vehicle is stolen, Loan Gap coverage will pay the unpaid balance of your loan if greater than the actual cash value of the vehicle.
Lease Gap Coverage
If you are leasing a vehicle for a period of 12 months or longer that hasn’t been previously titled, your vehicle may be eligible for Lease Gap Coverage. Like Loan Gap coverage, Lease Gap coverage protects you if the actual cash value of the vehicle at the time of an accident or theft is less than the amount you owe and prevents you from paying the difference out‐of‐pocket.
Carriers may use the ISO Commercial Auto form or they may use their own form. Under the ISO Endorsement Form CA 20 71, the carrier will pay any unpaid amount due on the lease or loan for a covered “auto” less:
- The amount paid under the Physical Damage Coverage Section of the policy: and
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 returned by the lessor.
d. Cost for extended warranties, Credit Life Insurance, Health, Accident or Disability Insurance purchased with loan or lease; and
e. Carry‐over balances from previous loans or leases.
Be sure to consider including Loan/Lease Gap coverage when purchasing insurance for a new vehicle or adding a new vehicle to an existing policy. Most carriers offer this coverage at a very reasonable price. Don’t Be Left Holding the Bag!