Will Gap Insurance Cover a Car That Has Been Repossessed?

by Michael Ryan

    Guaranteed Auto Protection, or GAP, is a special type of insurance policy that pays the difference between the value of your vehicle and the amount owned when your auto insurance company has to total your car or truck because of accident, damage or theft. A GAP policy reduces the risk to people who finance a vehicle by covering the amount that is left on a loan after the insurance company settles with the lender or lien holder for the vehicle's value. GAP insurance does not cover your losses due to repossession.

    Significance

    When you don't make your monthly payments as agreed, the lender or lien holder can cancel your GAP insurance policy and take back ownership of your car. This is because GAP insurance is a refundable aftermarket insurance policy purchased with a vehicle, separate from standard auto insurance. By canceling your GAP insurance, your lender will receive a prorated refund for the unused portion of your GAP policy to reduce the amount owed on your vehicle upon repossession.

    Process

    The lender notifies the dealership where you purchased your vehicle when it repossesses it. The dealership then cancels the GAP policy with the issuing insurance company. Although most GAP cancellations require the signature of the policyholder, this does not apply when your policy is cancelled because you were behind in your payments and your vehicle is repossessed. Once your policy is cancelled, your GAP insurance is no longer effective.

    Rationale

    GAP policies include specific language that GAP claims will be covered only if "the trigger event does not occur during or after a repossession or confiscation of the vehicle." GAP policies don't apply to a vehicle's repossession. If GAP insurance policies did shield owners from responsibility for their debt, and paid the difference between actual cash value and the loan balance on repossessed cars, the lender would have no way to recover its losses because of repossession.

    Aftermath

    After repossession of your vehicle, you have the option to reinstate your loan and get your vehicle back, if you pay the past due balance and the cost of repossession, storage and other fees associated with repossession. Otherwise, the lender will sell the vehicle at an auction or wholesale lot, and you will be responsible for the difference between the selling price and the outstanding loan balance. Because the GAP policy does not apply to repossession, you are legally responsible for this balance.

    Photo Credits

    • Thinkstock/Comstock/Getty Images