What is covered by gap insurance?

Gap insurance covers any situation where the car is a total loss, it's covered by car insurance, and the claim settlement is less than the loan. If you lease and your car is totaled while it's still being leased then gap insurance will pay off what remains of that lease balance. In other words, it covers negative equity, better known as being upside down on your loan.

It only covers the portion of your loan that is left after the insurance company pays the actual cash value of your car. Gap insurance kicks in no matter how your car is totaled. This includes:

Any situation where your insurance company declares the car a total loss and covers the actual cash value of the car, gap insurance will kick in to pay the difference. 

What gap insurance doesn’t cover

Gap insurance doesn't cover anything but what you owe on the loan when your car is totaled by the insurance company. It won’t pay out if you have missed loan or lease payments or if you default on the loan and it doesn’t cover any loss that isn’t part of your car insurance policy, such as engine failure.

Gap insurance only covers your car. It doesn’t cover anything else related to an accident, including medical bills.

Gap insurance also doesn’t cover:

  • Items purchased with the auto loan, such as extended warranties or credit life insurance.
  • The unused balance of an extended warranty.
  • Any balances from prior loans.
  • Lease or loan security deposits.
  • Any equipment that you added to your car beyond what was factory-installed.
  • Past due loan or lease payments.
  • Lease penalties for excessive mileage.
  • Deductions made by your primary insurer for previous damage, towing, storage and/or wear and tear.
  • Any other losses that are excluded from your auto insurance policy.

In addition, it's important to note that gap insurance isn't retroactive. You can't buy it after an accident and file a claim for that accident.

"As with all types of car insurance, a gap insurance policy must be purchased before the damage occurs in order for the claim to be covered," says Jaime Arias, a licensed car insurance agent with Dynamic Insurance Solutions. "You can't retroactively purchase gap insurance to cover your loan balance after your car is totaled in an accident."

When you purchase gap insurance, make sure you know exactly what is covered and what's not covered. Not all policies are alike, so be sure to read the fine print.

Auto insurance FAQs

Does gap insurance cover death?

Gap insurance only covers vehicle losses. It does not cover bodily injuries, medical expenses, lost wages, or funeral costs.

Does gap insurance cover engine failure?

Gap insurance does not cover engine failure. Gap insurance only covers the difference between your car's value and what you owe on your car loan if your car is totaled or stolen. For engine failure, you would need a warranty or mechanical breakdown insurance.