Replacement Coverage vs. GAP Coverage

Car crashWith the convenience of our daily driving comes the possibility and inconvenience of being involved in an auto accident. A total loss is possible, depending on what you’re driving and the extent of damage. But what exactly is a total loss? And do you know how to protect yourself from the financial consequences of such a loss?

The insurance industry typically defines a total loss vehicle as when the cost to repair the damages sustained in the loss meets or exceeds 75 percent of the vehicle’s actual cash value (ACV) and/or is otherwise impractical to repair. The ACV is essentially defined as replacement cost minus depreciation. Virtually all vehicles depreciate with every passing year and with increasing mileage. The purpose of an insurance policy is to indemnify, or in other words, put one back in the same position they were before the loss. By paying the actual cash value, you are being compensated for the value of the vehicle based on its current condition, age, and mileage. While this is a good thing, there are two better alternatives available.

The first alternative is something most people have heard of and applies to a financed vehicle; it’s called guaranteed asset protection or GAP coverage. GAP covers the unpaid balance of your loan (typically up to 150 percent) over the ACV. This prevents you from having to make payments on a vehicle you no longer possess or from rolling that unpaid balance into the financing of a replacement vehicle. It all but pays for itself in the event that you lose your vehicle to a total loss and you owe more on your vehicle than it is worth. Typically, you can purchase this at the dealership when you buy your vehicle or from your insurance company, if available, for an additional premium.

Speaking of replacement vehicle, there is coverage available under some automobile policies that does just that, called replacement coverage. This replaces the loss vehicle with a new one of the same make, model, and equipment as if it were new, without any depreciation for mileage or age. Replacement coverage typically only applies for vehicles not older than five years. This sounds like quite a good deal because it is! I believe it’s well worth the small additional premium that it typically costs to have this coverage. As a claims adjuster, I’ve seen many situations where an insured was upside down on their vehicle but unfortunately they had either not opted for or were not aware of replacement coverage, nor had they purchased GAP at the dealership.

Whether you are thinking of buying a new vehicle or already have a fairly new vehicle, it’s beneficial to look into these two types of coverages. It may very well save you a lot of money and frustration in the event of a total loss. Talk to your independent agent to make sure you have the necessary coverages in place.

The coverages described here are in the most general terms, and are subject to the actual policy conditions and exclusions. For actual coverage wording, conditions, and exclusions, refer to the policy or contact your agent.

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