Why a payoff balance can exceed market value, and how gap coverage is designed to bridge the difference.
A vehicle's market value can fall faster than the loan or lease balance is paid down, especially in the early months of ownership. If the car is declared a total loss during that period, the insurance settlement based on actual cash value may be less than the remaining payoff balance.
Gap coverage is designed to address that difference. It typically pays the gap between the actual cash value settlement and the remaining payoff balance on the loan or lease, subject to the terms and exclusions of the gap product.
Gap protection may be offered through an auto insurer as an endorsement, through a lender or dealer as a separate product, or built into certain lease agreements. The exact mechanics and exclusions vary by provider, so the underlying contract is the authoritative source.
