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Does Gap Insurance Cover Lemon Law?

  Norman Taylor & Associates
  December 11, 2009

The only thing gap insurance and lemon law has in common is that both provide protection for the car buyer. Gap insurance is a popular choice with many consumers because it fills the “gap” between a car’s value for insurance purposes and the owner’s outstanding debt on the car. For example, if you owe $20,000 on your car when it is totaled, the insurance may only reimburse you for the value of your car at the time of the accident. In other words, the vehicle may have depreciated quite a bit since time of purchase. If the insurance company only pays out $14,000 on your claim, you still owe the bank $6,000 to pay off the loan. A gap insurance policy will cover the $6,000 difference.

It’s pretty obvious that a defective vehicle (a lemon) is not worth what it should be. If you tried to sell the vehicle in its defective condition, the buyer would want a substantial discount in price taking the defect into account. Just like the car that has been involved in an accident, you may end up owing more on your lemon vehicle than you can get when you try to sell it.

Gap insurance will not protect you if in this scenario. You’re on your own, or, you can seek the assistance of a lemon law attorney. If successful you can recover not only your down payment and all payments made up to the time of settlement, but also the lender is paid off entirely and title to your lemon gets transferred to the manufacturer buying back. It actually works out much better than gap insurance.

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