The Maryland Insurance Administration is offering advice to car owners about risks of a total loss and how GAP insurance can help them.
The officials said that car owners sometimes assume − incorrectly − that if their cars are considered a total loss as a result of a collision, theft, or other covered cause of loss, their insurance claim will be settled for the amount they paid for the car — or at the very least, the amount they owe.
But regulators warned that often, this is not the case.
Instead, when a vehicle has been deemed a total loss, (which generally means the damage exceeds 75 percent of the actual cash value of the vehicle) most policies provide for payment of the actual cash value of the vehicle at the time of loss.
This could be less than the actual amount the driver may still owe on the loan or the amount due for a lease payoff. The difference between the car’s actual cash value and the balance on the loan or lease is the “gap” for which the car owner will be responsible.
Fortunately, there are alternatives, regulators said.
Many auto insurance companies offer GAP (Guaranteed Auto Protection) insurance as an optional coverage that is available for purchase when physical damage coverage (comprehensive and collision coverage) is included in the policy. GAP insurance can provide valuable protection if the insured has a loan or a lease. If a loss occurs, GAP insurance generally will pay the difference between the actual cash value of the vehicle and the current outstanding balance on the loan or lease.
Regulators advised that another option available to borrowers is to enter into a debt cancellation agreement. A debt cancellation agreement is a contract between the lender and the borrower that cancels out a debt in the event of a listed condition or contingency. A debt cancellation agreement is not insurance coverage.
Typically, an auto dealership, bank, savings and loan, credit union or finance company offers this kind of protection to its customers for an additional fee, which may be incorporated into the financing agreement, according to the Maryland Insurance Administration.
 
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