BRIDGING THE WRITEOFF GAP
Payouts that don’t cover loans an issue
Dilemma of the week: A reader got rear-ended and was deemed not at fault. The car, a 2013 Ford, was written off by the insurance company. The bigger problem? The payout was $12,000, yet she had $15,000 remaining on her car loan. The payout was fair.
The issue now is that $3,000 gap on top of having to replace her car. You might be surprised that a car that looks relatively fine can be deemed a writeoff. The problem is often all the tech involved. If an entry-level car has several airbags go off, it’s usually a throwaway. Replacing those bags is expensive. If a $12,000 computer system has been damaged, it could be rendered too costly to fix. Another problem is much of that tech is embedded in bumpers and mirrors, so even a modest parking-lot hit can damage costly sensors and cameras.
Before anything happens, this chasm between what you’re getting and what you need can be bridged on a new car in two ways. The first is on your insurance policy, where you can take a Limited Waiver of Depreciation. It’s available on new vehicles, usually for a 24- to 30-month period. It removes depreciation from the vehicle in the event of a total loss. If you paid $30,000 for a vehicle, you get $30,000 and your lease or lien is paid out. Aviva Canada has a five-year protection option, for example, but be sure to check out details and restrictions on any insurance. Securing the waiver through your insurance could raise your annual premium by about $30, depending on your driving record; signing up for it at the point of sale could be around $20 per month, so shop carefully.
The second option is available through the dealer. When you buy a new car, you can purchase gap insurance to cover the shortfall. You can also purchase it from third-party companies. I strongly suggest starting with your own insurance broker, which is where you’re likely to get the best deal. Different dealers carry different products, but I was once offered this coverage by a dealer at a monthly rate for what it ended up costing me annually through my insurance.
This information is useful if the car that has been written off is new, but my reader, with that 2013 model, would have been well outside the compensation boundaries even if she’d had gap coverage. So, she didn’t qualify for gap coverage, was offered a more-than-fair settlement from her insurance company, but was still out three grand. What are her options, from an insurance perspective?
She could sue the at-fault third party. The problem is that I have a reader with a problem that has a clock ticking on it, and when you need answers in a few days, watching it drag out in the courts for possibly years does little to solve the more pressing issues at hand. If you don’t have the resources to simply absorb the loss, is there anything you can do? One dealer I spoke to offered up the following: “If a new car had a rebate on it, say three or four thousand, you could create the loan on a new purchase without the rebate, and direct that money to pay off that shortfall. The rebate can be applied in several ways, and every customer is different,” he said.
Be careful inflating the value of a new-car loan in other ways when it comes to securing funding. If the value of your car is less than what you owe, you’re underwater. This is most likely to be in the first few years of your loan, making a writeoff collision potentially more costly in more ways than one. With the extended life of car loans — 84 months is now quite common — you run the risk of being underwater on your loan for longer.
Be prepared to be stuck with the difference between what your car is worth and what you might owe, and talk to your insurance broker when you get a new car.