How to mitigate risk in reviewing Manufacturer Lease Agreements
Is Gap Coverage slowly disappearing from Leases?
I have seen a disturbing trend in lease contracts over the last 5 years regarding the inclusion of GAP insurance (Guaranteed Asset Protection). Many lessors are replacing GAP Coverage, which was previously insurance purchased from a third party, with either:
Excluding GAP coverage altogether and charging for GAP as an optional product or
Modifying their lease agreements to include a “waiver of responsibility” clause in case of a total loss limiting the Lessor’s liability on most cases.
As leases are designed inherently to put you in an “upside down” position on the early period of the lease of not the entire lease, Gap coverage or language in the lease agreement is very important when there is a total loss involved. So please review your proposed lease agreement.
Here are some points I share from Experience:
GAP insurance inclusion/ inclusion of “waiver of responsibility” clauses in Lease contracts will vary from state to state depending on that particular state’s laws as well as vary from Manufacturer to Manufacturer. Those Manufacturer’s who have excluded GAP altogether may offer as an option Finance/Lease Product for a Fee. Ex. BMW may offer as a “Premium Product” in certain states. Some Lessors will offer GAP for 1 year or a duration less than the lease term.
More and more luxury Import EV’s as well as ICE vehicles are being declared as a total loss as the typical average scope of damage in general is becoming more expensive to repair especially in the case of EV’s.
Down payment or Capitalized Cost reductions on a lease are ALWAYS lost if your lease vehicle is declared a total loss, your lease did not have Gap or Gap waiver language, and there remains a amout owed on lease account after insurance proceeds have been paid to the lessor.
Multiple Security Deposits will generally be refunded unless the lease is terminated early for reasons other than a total loss. However, the policy of reimbursing MSD’s may vary from lessor to lessor as well as state to state. It is important to read specific lease language in your lease
Insurance must be effective at the time of total loss and maintained to the limits required by Lender, in order for GAP Insurance or waiver of responsibility to be effective.
Make sure you have adequate “Uninsured Motorist Coverage” . Most state requirements will stipulate a low limit or no limit at all when in many cases it does not even cover the cost of your leased vehicle. Ie. If you are leasing a $85,000 vehicle, I would suggest you have $100,000 coverage limit of Uninsured Motorist at the minimum added to your auto insurance policy.
In most leases that contain a Waiver of Responsibility language, you will be responsible if a total loss for any excess wear and tear that your insurance company deducts from their payment to the lessor
Make sure if you are assuming someone’s lease that the Gap provisions if any transferred to you.
It would specify it in the contract. It will say something about whether, and under which conditions, the lien holder will accept the FMV as established by the insurance company as the complete payout in the case of a vehicle loss.
If you search and spend a half hour reading, all these gap and one pay questions have been answered many times. There are posts from people that experienced total loss who describe exactly how it played out (“stolen equity” is a great search phrase here).
tl;dr
if a 1 pay or MSDs significantly reduce the rent charge, and you can, do it. Don’t worry about losing your 1P or MSDs in a total loss if you have gap
don’t put money down on a lease simply to lower the payment (to minimize the rent charge, maybe). Anything you pay toward a cap cost reduction is more likely to evaporate in a total loss.
gap insurance or waiver will cover any shortfall in a total loss, not “equity” (it’s not your “equity” on a lease, it’s the bank’s). Toyota and Mazda don’t include gap so you need to buy it separately, your car insurance is the first stop to see if they offer it, and how much - last I checked a few years ago mine offered it for about $1/mo, many carriers don’t offer it. Plenty of threads on that too.
Kia includes gap. But if I’m understanding correctly if my residual is say 40k. Let’s say I paid 26k for the one pay lease. If the car is totaled 6 months later and the car is worth let’s say 55k. I would get the 15k over the 40k to pay for the vehicle. Therefore I would be out 11k minus those 6 months so maybe 7k I would be out. Gap would not cover anything in that case.
Most brands these days do not provide any insurance overage to the lessee.
For one pays, there’s usually a prorated return of the initial payment, so if it was a 36 month you did a onepay on and you totaled after 6 months, you’d receive back 30/36 of your original payment, or about $21700. Wouldn’t matter if it was worth $55k, $30k, or $15k.
As always, you’d need to confirm the specific terms of your contract though.
A salesman at a Jeep dealer told me the exact opposite of this a few weeks ago. I raised the prospect of doing a one-pay on a 4xe, and he discouraged me from doing so on the basis of possibly not having complete coverage in the event of a total loss.
So basically, in the event that I finally find a deal I’m happy with, 10% of my attention needs to be on the words coming out of the salesman, and 90% needs to be on the specific language of any documents I’m confronted by
