My brand new car was totaled. Now what?

You spent weeks looking at reports and ratings online and visiting various dealerships before deciding on what make and model of new car you want. You’ve had your old car for almost 20 years, and it had well over 200,000 miles on it, so it was time for a change. You finally decided on a bright red, sporty Lexus RC F coupe. The kids are out of the house, but it does have back seats for passengers in a pinch. You love it. You look for places to go so you can zip around in your hot little red car.


You’re driving around town one day and BAM! A speeding truck hits you. A dump truck, in fact, and it totals your beautiful little red car. You’re heartbroken and a little sore, but otherwise uninjured thanks to your seat belt and airbags. After you fill out the police report, you file a claim with your insurance company, which provides you with a rental car. Now, you wait for the carrier to pay off your loan so you can get a new car. However, when you mention that to a neighbor who is an adjuster for another company, he gets a funny look and changes the subject. That is how it works, isn’t it? Well, it depends.

Cars unfortunately depreciate as soon as you drive them off the lot. If your vehicle was just a few months old, the carrier generally deducts the mileage from the purchase price, leaving you in pretty good shape. However, if your car was older, a year or more, that’s when it can get ugly, depending on the amount and length of your loan, and how much you put down.

If you have good credit, put no money down, and got a loan for five or six years, you’re probably over-financed. That means that you owe more on the vehicle than it is currently worth. But all your miles were highway miles; you washed it every week, kept it in the garage, and never ate in it. You always parked away from others, and it was in pristine condition. You may still be over-financed.

Yes, this happens. A lot. Because the accident was the fault of the dump truck driver, all you will receive is the cash value of your vehicle, regardless of your loan. The truck’s carrier is responsible only for the damage to your vehicle. Your personal financing has no effect on the value of the vehicle, so the dump truck’s insurer doesn’t owe you for that. The heartbreak continues.

Gap insurance

That’s why there is gap insurance, an endorsement that you can add to your auto policy (or even your loan) that pays the difference between what you owe and what the vehicle is actually worth. This endorsement was created as vehicles became more expensive and loans became longer. With gap insurance, the carrier pays the cash value of your vehicle, and then pays off the loan, leaving you free and clear to start over. This is ideal.

Nevertheless, you were hit by the dump truck; the accident is not your fault. You can still file a claim with your carrier, which will pay your claim and then go against the dump truck’s carrier for reimbursement. This way you’re restored to where you were before the loss.

What if you didn’t buy the gap insurance? You’re a safe driver, you don’t drive very far to work, and you figured you’d be safe. And you were — until the day you had that encounter with the dump truck. In that situation, you’ll be left paying on a loan for a vehicle you no longer have.

Even after you’ve had the vehicle a year or two you may still be over-financed. You maintained the car well, got the oil changed and all regularly scheduled maintenance on the dot. Doesn’t that increase the value of the vehicle? Unfortunately not. Cars need regular maintenance to remain in good condition, that’s why it’s called maintenance. Changing the fluids regularly and washing the vehicle every week doesn’t increase its value; it simply maintains it.

Now you’re stuck with part of a loan on a vehicle you no longer own. What happens now? In most instances, the balance of the existing loan is added into the loan amount for a new vehicle. Yes, it’s painful, but often necessary. Just remember two words: gap insurance.

Source: Christine G. Barlow, CPCU of PropertyCasualty360