Everyone knows the adage that a new car drops in value the moment it’s driven off the lot. Estimates are that the value drops 10-15% immediately, and up to 50% in the first three years.

Aside from the economics of purchasing an asset that decreases so quickly, it can also present a cash problem for a business if that car is damaged. When a car is stolen or “totaled,” the insurance carrier pays the ACV or the cost to replace. This is likely to be considerably less than the purchase or lease price, presenting a gap. The lender or lessor is demanding full repayment, which means the business must cough up the difference between ACV and full value of the loan or lease.

Car dealers offer a solution for the gap, but the cost and coverage can be questionable, and not subject to as much regulation. Perhaps a better alternative is purchasing coverage on a business auto policy. ISO uses form CA 20 71 (Auto Loan/Lease Gap Coverage) and preferred carriers use their own form.

If there is a total loss to a covered auto that is financed or leased, the policy covers the difference between ACV and the amount owed. For example, if a financed auto with a value of $30,000 is stolen, an unendorsed policy pays $30,000, less the deductible. But if the outstanding loan is $37,000, the insured is on the hook for the additional $7,000, plus the deductible. A policy with Gap Coverage would pay $37,000 (less the deductible).

There are a few exceptions to the ISO coverage. It is excess over any other collectible insurance, such as Gap coverage purchased from the lender or dealer. It also excludes: deferred payments; lease penalties for use, wear and tear, or mileage; unreturned security deposits; extended warranties; life and health insurance; carry-over balances from previous loans or leases.