Canadian Underwriter

When GAP insurance is an ‘easy profit maker’ for auto dealer

January 21, 2021   by Greg Meckbach

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Guaranteed Asset Protection is one way for automotive dealers to make money from consumers who make large down payments on their new vehicles, an automotive columnist suggests.

GAP insurance is intended to protect consumers who borrow money to buy their vehicles. Specifically, GAP helps protect motorists from quick depreciation of newly-purchased vehicles and the method insurance companies use to determine how much they will pay out on total losses, The Associated Press reports.

In a recent column posted to the Jalopnik website, Tom McParland reported he has received emails from readers asking about automotive dealers who want to sell GAP insurance. One writer told McParland he made a down payment of $10,000 on a new Honda CR-V. When that reader went to sign the contract with the auto dealer, he noticed there was a line adding GAP insurance for $599. The reader says he declined to buy GAP insurance, suggesting that, because he put $10,000 down, he was not concerned about owing more on the vehicle than it was worth.

“The simple fact is that GAP coverage is an easy profit-maker for the dealer,” McParland wrote in the Jalopnik column, published Dec. 29. McParland was commenting specifically on the scenario in which a consumer makes a down payment of $10,000 and borrows another $20,000 to purchase a $30,000 vehicle.

“I’m going to guess that this particular dealer probably sneaks that $599 fee into every contract, hoping that most people don’t catch it. If they do that over hundreds or even thousands of deals, that adds up,” wrote McParland. Thongbun

Jalopnik did not name the dealership. But if a consumer does not make a large down payment when borrowing money to buy a new vehicle, there is a good chance the vehicle will be worth less than what’s owed on the loan for several years, consumer advice editor Matt Jones wrote in an AP article originally posted to Edmunds.

GAP is sold by auto dealers across Ontario, Ontario Motor Vehicle Industry Council CEO John Carmichael told Canadian Underwriter earlier. GAP insurance can address the risk of a consumer having negative equity when borrowing money to buy a car, Carmichael suggested at the time.

In some Canadian provinces, statutory conditions stipulate that auto insurers are not liable for more than the actual cash value of the vehicle at the time of loss and damage. This means the insurer can deduct depreciation from the value of the vehicle.

In Alberta, motorists can buy optional additional coverage known as Limited Waiver of Depreciation, or SEF 43R.

“We would be creating, for ourselves, an [errors and omissions risk] if we did not provide that option with a brand-new vehicle. Every market offers it,” said Robyn Young, principal and owner of Lundgren and Young Insurance Ltd. in Calgary, in an earlier interview with Canadian Underwriter. Young, who is also president-elect of the Insurance Brokers Association of Canada, was asked by Canadian Underwriter what advice personal lines brokers should give clients about the financial risk of owing more on an auto lease than the vehicle’s replacement value.

In Ontario, clients can opt to buy the OPCF 43 Removing Depreciation Deduction and OPCF 43A Removing Depreciation Deduction for Specified Lessee(s).

The Ontario OPCF 43 takes away the auto insurer’s right to deduct depreciation when paying out on a total loss. The most the insurer is liable for is the lowest of the following three amounts:

  • The actual purchase price of the automobile and its equipment;
  • The manufacturer’s suggested list price of the automobile and its equipment on the original date of purchase; or
  • The cost of replacing the automobile with a new automobile of the same make and model, similarly equipped.


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1 Comment » for When GAP insurance is an ‘easy profit maker’ for auto dealer
  1. W Hazelton says:

    An interesting article, one step away from fraud. GAP insurance is designed to pay off the loan value, not to protect the value of the vehicle. The depreciation wavier purchased from your insurer is a far lesser price than gap insurance and gives the protection that it was designed for. Gap insurance is designed for idiots who continue to buy vehicles that they can not properly afford. e.g. When a person has a 50k loan against a new vehicle purchase of 41k. They were under water on a previous vehicle and rolled the unpaid loan balance on to the new purchase.
    It is unfortuate that so many people have put themselves in the position where they owe money than they should. Gap insurance should not be considered as a solution, but should be seen as the enabler of a problem.

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