Gap Insurance and Total Loss Claims

When Your Car Is Totaled and You Still Owe Money

A car accident in Chicago can total your vehicle in seconds. When the insurance company declares your car a total loss, they pay you the actual cash value of the vehicle. But here is the problem: if you owe more on your car loan than the car is worth, you are stuck paying the difference out of pocket.

This is where gap insurance comes in. Gap insurance covers the difference between what your car is worth and what you owe on it. If you have it, it can save you thousands of dollars. If you do not, you need to understand your options.

What Is a Total Loss?

Insurance companies declare a vehicle a total loss when the cost to repair it exceeds a certain percentage of the vehicle’s actual cash value. In Illinois, there is no fixed percentage set by law. Each insurer sets its own threshold, typically between 70% and 80% of the vehicle’s value.

For example, if your car is worth $20,000 and the repair estimate is $16,000, the insurer will likely total it. They will pay you the actual cash value rather than paying for repairs.

Actual Cash Value Explained

Actual cash value (ACV) is what your car was worth immediately before the accident. It is not what you paid for the car. It is not what a new one costs. It is the fair market value of your specific vehicle, considering its year, make, model, mileage, condition, and features.

Insurance companies use tools like CCC Valuescope and comparable sales listings to determine ACV. Their initial valuation is often lower than what your car is actually worth.

The Gap Between What You Owe and What Your Car Is Worth

New cars lose value fast. A new car can lose 20% of its value in the first year and up to 40% in the first three years. If you financed a car with a small down payment or a long-term loan, you are almost certainly upside down on the loan for the first few years.

Being upside down means you owe more than the car is worth. Here is an example:

• Car loan balance: $28,000
• Actual cash value at time of accident: $20,000
• The gap: $8,000

Without gap insurance, you are responsible for that $8,000. You lost your car, and you still have to keep making payments on a vehicle you can no longer drive.

What Gap Insurance Covers

Gap insurance (Guaranteed Asset Protection) covers the difference between the ACV payout and your remaining loan or lease balance. In the example above, gap insurance would cover the $8,000 gap.

Gap insurance typically covers:

• The difference between ACV and your loan balance
• Some policies also cover your insurance deductible (up to a certain amount)

Gap insurance does not cover:

• Overdue loan payments
• Extended warranty costs rolled into the loan
• Penalties for early loan payoff
• Carry-over balances from previous loans

Where to Get Gap Insurance

You can purchase gap insurance from several sources:

Your Auto Insurance Company

Most major insurers offer gap coverage as an add-on to your auto policy. This is usually the cheapest option, often costing $20 to $40 per year. You can add or remove it at any time.

The Dealership

Dealerships sell gap insurance at the time of purchase, usually for $400 to $800. This is significantly more expensive than getting it through your insurer. Dealership gap insurance is often bundled with other products and marked up heavily.

Your Lender

Some banks and credit unions offer gap coverage as part of the loan package. Costs vary but are generally between the insurer and dealership prices.

Standalone Gap Insurance Companies

Several companies sell gap insurance directly. Prices are usually competitive with auto insurer add-ons.

How to File a Gap Insurance Claim

Filing a gap insurance claim involves several steps:

1. File your regular insurance claim first. Your primary auto insurer must declare the vehicle a total loss and issue a payout before gap coverage kicks in.
2. Get the total loss settlement letter. This document from your primary insurer shows the ACV payout amount.
3. Get your loan payoff amount. Contact your lender for the exact balance owed.
4. File the gap claim. Submit the settlement letter, loan payoff amount, and any other required documents to your gap insurer.
5. Gap insurer pays the difference. The gap insurer pays the remaining loan balance directly to your lender.

The process can take several weeks. During this time, you may need to continue making loan payments to avoid damaging your credit.

Challenging a Low Total Loss Valuation

Before your gap insurance even comes into play, make sure the insurance company’s total loss valuation is fair. Insurance companies often undervalue totaled vehicles. You have the right to challenge their number.

Steps to Challenge the Valuation

• Review the valuation report carefully. Check for errors in the year, make, model, trim, mileage, and condition of your vehicle.
• Research comparable vehicles. Look at listings for similar cars in the Chicago area on sites like AutoTrader, Cars.com, and CarGurus. Focus on private party prices, not dealer prices.
• Document your vehicle’s condition. If your car was in excellent condition, had new tires, or had recent maintenance, provide receipts.
• Provide your evidence to the adjuster. Present your comparable sales and documentation. Ask them to adjust the valuation.
• Request an independent appraisal. Most auto insurance policies include an appraisal clause. If you and the insurer cannot agree on value, either party can demand a neutral appraiser.

Getting a higher ACV payout reduces the gap, which helps even if you have gap insurance. And if you do not have gap coverage, increasing the payout by even a few thousand dollars makes a meaningful difference.

What If You Do Not Have Gap Insurance?

If your car is totaled and you do not have gap insurance, your options include:

• Pay the difference out of pocket. This is the simplest but most expensive option.
• Negotiate with your lender. Some lenders will work with you on a payment plan for the remaining balance or may reduce what you owe.
• Roll the balance into a new loan. If you buy a replacement vehicle, some lenders will add the old loan balance to the new loan. This solves the immediate problem but puts you further upside down.
• Pursue additional compensation from the at-fault driver. If another driver caused the accident, your property damage claim may include the gap amount. An attorney can help you pursue this.

Total Loss Claims and the At-Fault Driver

When another driver causes the accident that totals your car, their liability insurance covers your property damage. But their policy only pays the ACV of your vehicle. It does not cover the gap between ACV and your loan balance.

However, you may be able to recover additional damages beyond ACV in certain situations. For instance, if the at-fault driver’s negligence was particularly egregious, or if you can show that the ACV payout is insufficient to purchase a comparable replacement vehicle.

You can also claim other expenses related to the total loss:

• Rental car costs while searching for a replacement
• Sales tax on a replacement vehicle (in some cases)
• Transfer and registration fees

Lease Vehicles and Total Loss

If you lease your vehicle, gap coverage is even more important. Lease agreements often include gap-like protection, but not always. Check your lease contract carefully. Some leases include it automatically. Others require you to purchase it separately.

When a leased vehicle is totaled, the insurance payout goes to the leasing company. If the payout does not cover the remaining lease obligation, you owe the difference unless gap coverage applies.

Diminished Value Claims in Illinois

If your car is damaged but not totaled, you may have a diminished value claim. Even after repairs, a car that has been in an accident is worth less than an identical car with no accident history. Illinois allows you to pursue diminished value from the at-fault driver’s insurance.

Diminished value claims are separate from repair costs. They compensate you for the permanent loss of value your vehicle suffers because of its accident history.

Protect Your Financial Interests After a Total Loss

If your vehicle was totaled in a car accident, truck accident, or motorcycle accident in Chicago, make sure you are getting fair value. An experienced attorney can challenge lowball valuations, negotiate with lienholders, and pursue all available compensation from the at-fault driver.

Call Phillips Law Offices at (312) 346-4262 or contact us online at /contact/ for a free consultation.