If your fleet vehicle is totaled or stolen, most insurance will prepare a settlement payment based on the actual cash value (ACV) of the vehicle. In most cases, this regular coverage is enough to cover your loss. But if your fleet vehicle was a newly financed or leased vehicle, you could end up underwater—owing more on a vehicle than your insurance can pay.

One solution is gap insurance, an optional coverage add-on that can help cover the “gap” between what you owe on your loan or lease and the depreciated value of your vehicle.

What Is Gap Insurance?

Guaranteed Asset Protection or gap insurance is a common optional insurance add-on that helps protect your business financially when you owe money on a depreciated vehicle in your fleet.

Insurance covers the actual cash or monetary value of your fleet vehicle just before it was damaged in the accident or stolen from the business. Age, mileage, physical condition and other factors reduce the value of a new vehicle, and value may drop faster than you are able to pay off the loan.

Many common fleet vehicles lose significant value as soon as you sign for delivery. Take the case of a Ford F-150 pickup, which retails for about $50,000 new. Over the first year, Edmunds reports a depreciation of more than $14,000 or about 28 percent of the truck’s value. Even on the day of purchase, most vehicles typically lose 10 percent in value.

If your new fleet vehicle is lost in the first weeks or months of operation, your business may owe thousands on the loan or lease even after settling with insurance, placing excessive strain on business finances. Gap insurance can help cover this deficit and protect against negative equity.

When Is Gap Insurance Needed?

Fleet managers ought to consider gap insurance coverage for a new vehicle when equity will go into the red due to depreciation. This is not a problem that will impact all fleets at all times, so only managers facing certain exposures need coverage, such as when:

  • Making a down payment below 20 percent of the vehicle’s price.
  • Financing the vehicle for a period of 60 months or longer.
  • Choosing a make and model that depreciates faster than average.
  • Financing dealer products, service agreements, taxes and other fees.
  • Rolling negative equity from a previous vehicle into new financing.
  • Putting higher than average mileage on the vehicle in the first year.
  • Leasing the vehicle (gap coverage is often included in lease agreements).

It’s important to note that you don’t need gap coverage for the life of the loan or full ownership term of the vehicle. When the equity of your fleet vehicle exceeds the amount left on the loan or lease, gap coverage is no longer necessary and can safely be cancelled.

Gap Insurance Benefits to Fleet Managers

Fleet managers can benefit from gap coverage in several ways. With coverage, you can add the vehicles you need to your fleet with financing rather than footing full cost upfront. You can also take advantage of offers such as a lower down payment, extended finance terms, and rolling other costs or debt into the financing, if needed, while still minimizing your exposure.

Fleet managers with gap coverage may also benefit from a more efficient claims and settlement experience if a vehicle is totaled or stolen, allowing you to move forward without the burden of negative equity.

Gap coverage can help fleet managers manage the financial exposure of these depreciating business assets, making for more predictable cashflows, reserves and expenses.

When Is Gap Insurance Worth It

Gap insurance is not always necessary but could save fleet owners thousands under certain circumstances. With high sticker prices, a new vehicle could easily lose $5,000 to $10,000 or more in value in the first weeks and months after you add it to your fleet. A total loss or theft of one or more new vehicles without coverage could put your budget in the red. By comparison, the cost of adding on gap coverage is usually far less.

Where Can You Get Gap Insurance

Gap insurance coverage is often available from auto dealers with the purchase of a new vehicle, although this convenience comes at a premium price. Most insurers offer gap coverage as an optional add-on coverage with comprehensive and collision coverages for newly financed vehicles.

Contact Lockton Affinity to see the most effective way to insure your business’s vehicles with Gap Insurance.