March 5th, 2021
GAP losses have significantly increased over the last several years. This is due to a wide array of reasons, including:
- The increasing price of cars and larger loan amounts
- Extended loan terms and higher loan-to-value (LTV) ratios
- Negative equity trends
- The cost to replace electronic components and airbags
- Increased miles driven
- Texting and driving
- Decreased value in used cars
As the frequency and size of GAP claims continue to increase, we have also seen a worrisome trend of your borrowers’ insurance companies suppressing claim settlements for total loss or theft claims. This is especially true when borrowers have purchased optional GAP coverage. The insurance company knows the GAP waiver will help offset lowball claim settlements.
Most of the total loss settlements you receive do not have GAP coverage. If a lender accepts an inadequate settlement, your borrower must make up the shortfall. If there is GAP coverage, the claim will be higher, which increases losses and subsequently increases rates over time. We are recommending that lenders proactively manage the collateral valuation process and help advocate for and educate their borrowers.
Below is an outline of simple steps that lenders can take to protect their borrowers and push back on undervalued claims in a total loss or theft scenario.
- Do not sign the guarantee of title until properly researching the claim and, more importantly, the collateral’s actual cash value (ACV).
- Calculate the collateral’s ACV and make sure taxes and fees are included in the settlement.
- There are tools available from the National Automobile Dealers Association (which is most frequently used by insurance adjusters), Auto Trader, Kelley Blue Book, and others. Use these resources to find comparable cars and values.
- Typically, insurance carriers use the average of wholesale and retail value while factoring mileage to determine the fair value.
- Determine if your calculated value (before deductible, wear and tear, etc.) is in line with the insurance carrier’s value. If your valuation is $500 or more than the insurance company’s, we recommend disputing the proposed settlement and negotiating a better deal.
- We recommend that the lender and the borrower work as a team. The borrower can reach out to the local agent or directly to the insurer to obtain a fair settlement.
- Adding a valuation review to your total loss claim procedures makes sense. It will save your borrowers money while simultaneously improving GAP program losses and stabilizing rates.
For more information about GAP program losses, contact Lee & Mason today.