Heidi Mertlich

Licensed Insurance Agent

Heidi works with top-rated insurance carriers to bring her clients the highest quality protection at the most competitive prices. She founded NoPhysicalTermLife.com, specializing in life insurance that doesn’t require a medical exam. Heidi is a regular contributor to several insurance websites, including FinanceBuzz.com, Insurist.com, Finance101.com, and Forbes. As a parent herself, she under...

Licensed Insurance Agent

Ty Stewart

Licensed Insurance Agent

Ty Stewart is the founder and CEO of SimpleLifeInsure.com. He started researching and studying about insurance when he got his first policy for his own family. He has been featured as an insurance expert speaker at agent conventions and in top publications.  As an independent licensed insurance agent, he has helped clients nationwide to secure affordable coverage while making the process simpl...

Licensed Insurance Agent

UPDATED: Jun 27, 2023

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UPDATED: Jun 27, 2023Fact Checked

Vehicles depreciate rapidly, and a vehicle that’s been involved in an accident loses value even quicker. Although auto insurance will pay for the repairs to a vehicle, standard full coverage insurance does not cover the loss of value a vehicle may receive after the accident occurs. There are two ways to recover the loss of value on a damaged vehicle: gap insurance and diminished value. These two things are not interchangeable, however, and they work very differently.

What is Gap Insurance?

Gap insurance is a supplemental policy that can be purchased for leased and financed vehicles. New vehicles depreciate rapidly, and if a new vehicle is totaled in an auto accident, it may be worth less than the outstanding value on the car loan. This occurs because the total loss settlement will be equal to the actual cash value of the vehicle, which may be substantially less than what a car owner actually owes on the vehicle.

Whenever a financed vehicle is involved in a collision, the settlement is paid toward the repair of the vehicle; if the car cannot be repaired, the total loss settlement is sent to the lien holder that’s financing the car. The vehicle’s owner will only receive settlement if it exceeds the outstanding balance on the loan.

Without gap insurance, an individual may be required to continue making car payments on a vehicle they no longer own. This will leave them with debt and without a vehicle. In order to combat this concern, many people who buy new automobiles decide to purchase gap coverage.

Gap insurance is usually offered by dealerships or financing companies, and the premiums are paid alongside the monthly car payments. If a vehicle is totaled, the gap insurance bridges the gap between the vehicle’s worth and the balance on the car loan.

Filing a Gap Insurance Claim

It’s important to understand that most gap insurance is covered by a different provider than the vehicle’s main auto insurance. This means that you will need to file a separate claim against your gap policy in order to receive benefits. If you don’t know who carries your gap insurance, check with the lien holder; they should be able to locate the insurer for you and point you in the right direction for filing the claim.

What is Diminished Value?

After a car is involved in an accident, its resale value diminishes. Even if the car is repaired flawlessly, future buyers will be able to see on a VIN report that the vehicle was involved in a collision, and buyers are wary of purchasing a car with an accident history. In some cases, auto repairs may cause a car’s resale value to drop by 30% or more.

In order to make up for this lost value, insurance companies offer a diminished value settlement. This occurs after the claim has been settled and the vehicle is repaired. The insured must have the vehicle appraised and determine what its worth was both before and after the collision; the insurance company will then negotiate a settlement based on that figure.

The diminished value claim will not change the car’s resale value. Instead, it is offered as a one time payment directly to the insured as compensation for the lost value. This money can be used in any way that the insured sees fit, but no further claims for diminished value can be submitted for that vehicle.

Filing a Diminished Value Claim

In order to file a claim for diminished value, the vehicle must have been involved in an accident that was not your fault. You cannot recover diminished value on an accident that you cause. Because these claims are not-at-fault collisions, the settlement usually comes directly from the at-fault party’s insurance, even if your repairs were handled by your own insurance company.

Whenever you call the insurance company that will be handling the diminished value, reference your accident claim and explain what you need. You will receive paperwork in the mail that will begin the diminished value process. Once the paperwork has been submitted, an adjuster will inspect your vehicle and offer settlement based on its appraised value. This figure is negotiable, but you must have evidence to back up your request for a higher payment.

Both gap insurance and diminished value payments are ways to recover the loss of value that a vehicle may receive as a result of an auto accident. By understanding in advance how these work, you can ensure that you will truly be paid what your vehicle is worth if it’s ever involved in an accident. If you have any questions about either of these processes, you can discuss them with your insurance agent; he or she will happily go over them in detail to answer any specific questions you may have.

Case Studies: Gap Insurance and Diminished Value in Auto Insurance

Case Study 1: Gap Insurance

In this case study, we explore the importance of gap insurance for leased and financed vehicles. We examine the scenario where a new vehicle is involved in an accident and is deemed a total loss. We discuss how gap insurance can bridge the gap between the actual cash value of the vehicle and the outstanding balance on the car loan.

Case Study 2: Diminished Value

In this case study, we delve into the concept of diminished value after a car accident. We examine how a vehicle’s resale value can significantly decrease even after flawless repairs. We discuss how insurance companies offer diminished value settlements to compensate for the lost value and how the insured can file a claim for such compensation.

Frequently Asked Questions

Is diminished value the same as Gap Insurance?

No, diminished value and gap insurance are not the same. Diminished value refers to the loss of a vehicle’s value after an accident, while gap insurance covers the difference between what you owe on your car and its actual cash value if it is totaled or stolen.

What is gap insurance?

Gap insurance is a supplemental policy that covers the difference between the actual cash value of a vehicle and the outstanding balance on a car loan, in the event that the vehicle is totaled in an accident.

How does gap insurance work?

If the vehicle is totaled, the gap insurance will pay the difference between the vehicle’s worth and the balance on the car loan. The premiums for gap insurance are paid alongside the monthly car payments.

How do I file a gap insurance claim?

You will need to file a separate claim against your gap policy in order to receive benefits. If you don’t know who carries your gap insurance, check with the lien holder; they should be able to locate the insurer for you and point you in the right direction for filing the claim.

What is diminished value?

Diminished value refers to the loss of a vehicle’s value after an accident, even if the vehicle has been repaired flawlessly.

How does diminished value work?

The insured must have the vehicle appraised and determine what its worth was both before and after the collision; the insurance company will then negotiate a settlement based on that figure. The diminished value claim will not change the car’s resale value. Instead, it is offered as a one-time payment directly to the insured as compensation for the lost value.

How do I file a diminished value claim?

The vehicle must have been involved in an accident that was not your fault. You cannot recover diminished value on an accident that you cause. Whenever you call the insurance company that will be handling the diminished value, reference your accident claim and explain what you need. You will receive paperwork in the mail that will begin the diminished value process. Once the paperwork has been submitted, an adjuster will inspect your vehicle and offer a settlement based on its appraised value.

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Heidi Mertlich

Licensed Insurance Agent

Heidi works with top-rated insurance carriers to bring her clients the highest quality protection at the most competitive prices. She founded NoPhysicalTermLife.com, specializing in life insurance that doesn’t require a medical exam. Heidi is a regular contributor to several insurance websites, including FinanceBuzz.com, Insurist.com, Finance101.com, and Forbes. As a parent herself, she under...

Licensed Insurance Agent

Ty Stewart

Licensed Insurance Agent

Ty Stewart is the founder and CEO of SimpleLifeInsure.com. He started researching and studying about insurance when he got his first policy for his own family. He has been featured as an insurance expert speaker at agent conventions and in top publications.  As an independent licensed insurance agent, he has helped clients nationwide to secure affordable coverage while making the process simpl...

Licensed Insurance Agent

Editorial Guidelines: We are a free online resource for anyone interested in learning more about car insurance. Our goal is to be an objective, third-party resource for everything car insurance-related. We update our site regularly, and all content is reviewed by car insurance experts.