Who Needs Auto Insurance With a Leased Car?
Car Insurance Still Required When Leasing an Auto
Apr 1, 2009
Leasing a car is a preferred option for some drivers who plan on driving the car for only two or three years. Since the car isn’t owned by the driver, there’s no worrying about things like valuation and depreciation. Furthermore, the driver gets to drive a new car every three years or so.
Leasing has its advantages for sure, but the driver is still responsible for insuring the leased car under his or her auto insurance. However, auto insurance when leasing a car is slightly different than when purchasing a car outright, particularly when it comes to GAP auto insurance.
Auto Insurance for Leased Cars: What Car Dealerships and Lenders Require
While liability auto insurance is mandatory in some form or another in all 50 U.S. states, car dealerships and lenders require leased cars to carry comprehensive auto insurance in addition to collision auto insurance. Comprehensive auto insurance protects the driver financially against theft, vandalism, windshield cracking/chipping, animal strikes, and damage from acts of God. Collision auto insurance protects the driver financially against damage to the car in the event of an auto accident.
Comprehensive, collision, and liability auto insurance generally comprise what is called full auto insurance coverage. Because the driver does not own the leased car, lenders and car dealerships require drivers to be fully covered under auto insurance. Otherwise, they’d have to pay for car damages.
Auto Insurance for Leased Cars: GAP Auto Insurance
GAP (Guaranteed Auto Protection) auto insurance pays the driver the amount between what the driver still owes on a lease and what the auto insurance company has determined for the actual cash value (ACV) of the car in the event that the car is declared a total loss through an auto accident or an act of God.
For example, a tree crushes a newly leased car that had an ACV of $24,000 at the time the lease contract was signed. When the auto claim is filed, auto insurance values the car at only $20,000; yet the lender still demands full payment. GAP auto insurance then covers the $4,000 owed by the driver.
For leased cars, GAP auto insurance is typically written into the lease contract. Technically, the lessee will be charged a fee for what is called a GAP waiver. A GAP waiver is a legal term that waives the lessee’s responsibility for paying the car dealership the GAP amount in the event of a total loss.
Auto Insurance for Leased Cars: The Bottom Line
Although the driver does not own the leased car, he or she must still cover the car under full auto insurance including collision, liability, and comprehensive. While the GAP auto insurance waiver may add an additional cost, it provides a financial cushion in the event of a total loss.
See related articles, “GAP Auto Insurance: Safety Net or Ripoff?,” "Understanding Auto Insurance Liability,” and "Understanding Auto Insurance Terminology.”
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