Under the terms of a loan or lease on an automobile, at the time of a total loss, there is often a difference between the amount your insurer will pay as actual cash value (under comprehensive or collision coverage) and the amount which you owe to the entity that financed or leased the vehicle (such as the bank or auto dealer). This difference, which can be hundreds or even thousands of dollars, is called the “gap amount”. Gap coverage pays this amount in the event of a total loss.
Currently, you can purchase a “waiver” of the gap amount directly from the lender or dealer, who in turn has purchased gap insurance to cover the vehicle. Alternatively, some insurers may offer a separate policy or an endorsement to your personal automobile policy to cover this gap amount.
In addition, some lenders and leasing companies financing contracts state that the amount of settlement by the physical damage insurer (based on actual a cash value) will be accepted as full satisfaction of the contract in the case of total loss to the vehicle. In these cases, neither a gap waiver nor policy is necessary, as no “gap” exists.