What is gap insurance?
Gap insurance is an optional insurance you can add to your commercial auto policy alongside comprehensive and collision coverage. It can help you bridge the gap between what insurance pays out for a total loss and the remaining balance on your car loan.
Insurance companies use your vehicle’s actual cash value (ACV) when paying out claims for total loss. In other words, they base the claim amount on your car or truck’s current market value — not what you paid for it. You’re still responsible for paying off the remainder of the car loan, even if the car’s been totaled. If you financed the vehicle, you could find yourself paying on a car loan for a vehicle you don’t have anymore.
With gap insurance, your gap policy would cover making the rest of those loan payments.
Don’t confuse gap insurance with stop gap insurance, also called stop gap employer liability insurance. This is a different product to help employers cover costs not covered by your workers compensation insurance.
How does gap insurance work?
After a covered event with your business vehicle, such as an accident or theft, you file a claim on your commercial auto insurance policy with your insurance company. If the insurance adjuster declares the vehicle a total loss, your insurer usually sends you a check for the amount of your truck or car’s actual cash value, or what it would be worth right before it was totaled. ACV accounts for age, mileage and condition which can depreciate a vehicle’s value.
But if you took out a loan to buy the vehicle for your business, there’s a problem: That check only covers a portion of what you still owe to the lender. Depending on the work vehicle, that could be tens of thousands of dollars you’d need to pay out of pocket. This can be a hardship for small businesses with unpredictable cash flow or limited credit.
If you have gap protection, the problem is solved. Your policy will pay off the remainder of the loan. Without gap protection, you’d pay that difference yourself, even though you no longer have the vehicle you used the loan to buy.
What could gap insurance cover for small business owners?
Gap insurance could help cover some of the costs baked into buying vehicles for your business that a commercial auto policy usually won’t cover, including:
- Depreciation on newer vehicles: Some work trucks and vans lose value quite quickly in the first one to two years after purchase.
- Costs rolled into the car loan: Your regular auto policy won’t cover costs like origination fees, extended warranties or customizations like racks or toolboxes. If these have been rolled into your loan, gap coverage could help.
- Leased vehicles: Gap insurance isn’t just for cars, trucks, trailers or vehicles you buy for business use. You can get gap protection for leased vehicles, too. It’s especially valuable for protecting your business from early termination fees, which may kick in when a vehicle is declared a total loss.
A gap insurance policy can protect you from a lot, but there are a few things it won’t cover, including:
- The contents of the vehicle, including equipment and materials
- Repairs for a partial loss
- Lost wages or revenue after an accident
- Your deductible (unless expressly stated in your commercial auto policy)
- Negative equity you’ve rolled into the loan
Gap insurance isn’t a replacement for comprehensive or collision coverage; those coverages may be required before adding gap to your policy. If you’re in construction and cleaning and concerned about insuring the contents of your work truck or van, tool and equipment insurance, also called inland marine coverage, may offer the coverage you’re looking for.
Does gap insurance cover theft?
Gap insurance can cover theft if it’s a covered loss under comprehensive coverage in a commercial auto policy. However, gap protection usually only kicks in after your comprehensive coverage has paid out the actual cash value of the vehicle.
How do I know if I have gap insurance?
If you’ve financed the purchase of your vehicle for work, check your commercial auto insurance policy to see whether you opted to add gap insurance. You can also check your loan documents, as some dealers offer gap insurance as an add-on when you buy the vehicle.
If your business vehicle is leased, check your lease paperwork to see if there’s a “GAP waiver” or “Guaranteed Asset Protection” coverage included in your leasing contract. Gap protection is sometimes included automatically. You can also check with the leasing office at the dealership or review your auto insurance policy to see if it’s included.
Is gap insurance coverage worth it for business owners?
Gap insurance could be valuable protection for your small business in some circumstances.
Consider adding gap coverage if:
- Your business can’t swing a multi-thousand-dollar surprise bill. If cash flow is too unpredictable, or if keeping up with loan payments could push your business into debt, gap insurance could be more cost-effective.
- You bought the vehicle with little or no money down. Auto loans with minimal down payments take longer to build equity than if you bought the car with a hefty down payment.
- Your vehicle is a commercial van, work truck or delivery vehicle. These specialized vehicles can be pricey to buy and depreciate fast.
- You can’t risk being without a work vehicle. Gap insurance helps you pay off the old loan so you can get into a new auto loan — and business vehicle — quickly.
You may be able to skip the gap insurance add-on if:
- You bought the vehicle outright. If there’s no loan, there’s no need for gap protection.
- You put down a sizable down payment. If you’re only financing a small portion of the vehicle’s value, paying for gap insurance may not make sense.
- Your vehicle holds its value well. Some cars and trucks retain their value more than others. If yours is a popular model that isn’t likely to lose much value, gap protection may not be necessary.
- You can self-insure any gap that remains. Gap insurance isn’t the only way to cover the gap between a vehicle’s ACV and the insurance payout. If you feel comfortable paying off the remainder of your auto loan from your business reserves, feel free to pass on gap coverage.
How much does gap insurance cost?
The price of gap insurance varies, much like the cost of commercial auto insurance can vary. Its cost depends on a few factors, including:
- Whether you buy it from the dealer when you buy the vehicle, or shop for a policy from an insurance company.
- Whether it’s a standalone policy or rolled into your car loan.
- Whether the vehicle is leased or financed.
- The age and value of the vehicle.
- The amount, length and other terms of your loan.
How long does gap insurance last?
For auto loans, you don’t have to keep your gap coverage for the entire loan period. When the balance of your loan falls below the value of your car, you can drop gap protection.
Gap insurance is temporary coverage. It only lasts as long as your loan or lease agreement, and not the entire time you own the vehicle. If you have a two-year lease, then you’d have gap insurance for two years as well. If you purchase the vehicle at the end of that lease, you could buy a new gap insurance policy or go without it.
Do I need gap insurance if I have full coverage?
Full coverage car insurance means you have comprehensive and collision insurance in addition to basic liability. Your comprehensive policy usually pays the value of your vehicle if it’s stolen or totaled. You’re not required to add gap coverage if you don’t want to; it’s certainly not mandatory.
The reason some small business owners add gap insurance when they have full coverage auto insurance is because they’re worried about that gap between the value of the vehicle and the remaining loan balance. Gap only kicks in after comprehensive coverage has paid out.
When does gap insurance not pay?
There are some instances when a gap policy might not pay out, including:
- The vehicle is not deemed a total loss
- You’ve missed payments on your loan or lease
- The policy has lapsed
- Your full coverage auto policy denies the claim
- The damage was intentional
- The damage occurred while the driver was committing a crime or driving under the influence
- If the owner, insured and financing paperwork don’t match
- If the amount exceeds any coverage caps spelled out in your policy
To avoid surprises when filing a claim, make sure you understand your gap insurance coverage.
Where to buy a gap insurance policy
You can buy gap protection from a number of different sources, including:
- The dealership where you buy or lease the vehicle
- A commercial auto insurance provider
- An insurance provider that specializes in gap protection
- The lender financing your vehicle
Note that ERGO NEXT does not sell gap insurance coverage. But we do offer commercial auto insurance through our trusted partners, as well as other business insurance protections that could help support your small business when things go wrong.
