New GAP Insurance Law in Effect

AB
125 – Chapter 24 – Ins. Code §§1758.96 & 1758.992

Effective on May 10, 2011 (Urgency
Bill)

Summary: Clarifies that insurance deductibles may be covered by GAP
insurance, expands the types of vehicles that can be covered by GAP insurance,
and clarifies the role of “waiver” clauses.

Background: When a car is totaled in an accident, insurance companies
typically pay the replacement value, known as the “actual cash value.” Since
cars lose a lot of their value as soon as they are purchased, and consumers may
owe more than the actual cash value, many consumers find themselves owing a
lender much more than the insurance settlement will provide if they total a
relatively new car. To fix this possible loss, the legislature allowed insurance
companies to sell GAP (guaranteed automobile protection) insurance which would
take care of that difference. However, the Department of Insurance issued an
opinion that the statute does not permit GAP insurance to cover the consumer’s
automobile insurance deductible, although it could pay consumers up to an
additional $5,000 necessary to purchase another car.

The New Law: Clarifies and fixes problems with the current law by:

• Changing the definition of “GAP” so that the deductible amount provided by a
  standard property damage insurance policy may also be covered by GAP insurance.
• Providing that a “waiver” clause in a vehicle conditional sales contract or
  lease agreement may include the deductible amount provided by a standard
  property damage insurance policy. A waiver clause is similar to GAP insurance
  and can be sold by people who are not licensed insurance agents.
• Replacing the word “automobile” with the word “asset” in the definition of
  these contracts so that other vehicles, such as motorcycles, motorhomes, boats,
  and off-road vehicles, are also eligible to be covered by GAP protection.
• Authorizing waiver clauses to also include a discount or incentive, above
  the amount required to satisfy the obligation on the loan, lease or sales
  contract, for the vehicle owner to purchase a replacement vehicle using the same
  seller, lender or lessor.

Thanks to the Los Angeles County Consumer Affairs Department for providing this info!