Is GAP Insurance Required? What Canadian Consumers Need to Know

Gap insurance
By Marketing team
July 04, 2019Articles

GAP insurance -- also known as guaranteed auto protection, or guaranteed asset protection -- is designed for drivers who find themselves owing more in financing or on a lease than their vehicle is actually worth, which is sometimes referred to as being “upside down” on a loan.

In such cases, GAP insurance covers the difference between the actual value of your vehicle as determined by your insurer, and the amount you may still owe on it after it's been accidented beyond repair, destroyed by flood or fire, or stolen -- in other words, if it's deemed a total write-off by your insurance company.

Here we've assembled a brief list of frequently asked questions regarding this type of insurance.

Do I need GAP insurance? 

You don't necessarily need GAP insurance -- certainly not for older vehicles or any vehicle you've already paid for in full. In fact, most buyers, particularly those who have already made a significant down payment, will always be “right-side-up” -- as opposed to “upside down” -- on their vehicle loan and therefore won't benefit from GAP insurance.

But there are times when it can prove to be a wise investment -- particularly if you're buying a new car or truck and have only put up a minimal down payment, say, less than 20%. Under those circumstances, GAP insurance is relatively inexpensive and can prove to be a very valuable asset.

As every savvy auto shopper knows, a new vehicle loses a significant amount of its value the moment it's purchased and driven off the dealer's lot. Most vehicles depreciate between 20% and 25% within the first two years of purchase, while higher-end cars and trucks depreciate even faster.

According to, rule of thumb dictates that the average new vehicle depreciates by a minimum 11% the moment it's sold and is worth at least 20% less one year later.

What does that mean? Say for instance that you buy or lease a new vehicle and accidentally drive it into a wall 20 minutes later,  causing the car be written off. Your insurer will cover you for the value of your car at the time of the accident. If you paid $100K for the vehicle -- and it's already lost 11% of its value by sheer virtue of your having purchased it -- that's a full $11K you'll be out. Meanwhile, you'll only have $89k to find another vehicle to replace it with.

Admittedly, that’s a rather unlikely scenario, but it isn’t impossible.

Auto loans with lengthy repayment schedules are increasingly popular, and terms of 60 months or longer are no longer uncommon. Such arrangements involve carrying a balance on the loan for a longer period of time, increasing the gap between finance costs and the vehicle's value. What’s more, some vehicles depreciate faster than others, so the value of your car at the time it's totalled could be significantly less than what you owe on it.


Other reasons to consider GAP insurance:

  • Your current vehicle insurance policy lacks replacement value coverage.
  • You've upgraded your vehicle before term and rolled your current financing agreement into a new car loan. If you had negative equity on your previous vehicle and the dealer rolled that balance into your new loan at trade-in, chances are you owe more than the new vehicle is worth.
  • Your annual mileage is high. The more kilometres you put on a vehicle, the faster its value depreciates.


Is GAP insurance expensive?

No, not especially. While rates obviously vary, GAP insurance typically costs roughly 5% of your comprehensive vehicle insurance package. Even still, it's always wise to do some shopping around.

While most people tend to purchase it through their dealership, individual insurance companies are usually the best option. With banks and auto dealerships the cost of GAP insurance is frequently wrapped into the financing arrangement, generally making it more expensive and harder to cancel -- which you will want to do as soon as you owe less on your loan or lease than the market value of your vehicle.


Will gap insurance cover a blown engine?

Probably not. This would only be applicable if your insurance company determined that the cost of repairing or replacing the blown engine was more expensive than the car is worth and decided to write the vehicle off entirely -- which isn't too likely to happen with a newer vehicle.


What else doesn't GAP insurance cover?

GAP insurance doesn't cover any maintenance or repair costs, nor can it be used to help cover your lease payments if you're having difficulty keeping up with them.

You can't make a claim should your vehicle be confiscated for legal reasons, nor can outstanding loans on your previous vehicle be applied to the new loan and subsequently claimed under a GAP insurance policy.


Are people ever obligated to purchase gap insurance?

Yes, there are times when purchasing GAP insurance is actually mandatory, as will be outlined in your loan or lease contract. Lenders sometimes insist borrowers secure the insurance when they've entered into an auto financing arrangement where no down payment was required.


Do I need GAP if I'm leasing my vehicle?

With a lease you're obviously still considered responsible if the car gets totalled or is stolen. Lease payments are typically smaller than financing payments, which means that the difference between what you've paid the lessor and the value of the vehicle can be substantial, making GAP insurance that much more pragmatic. In fact, many lease contracts require lessors to purchase it as part of the agreement.

If your commercial loan or lease is with Hitachi Capital Canada, we can waive your financial obligation in the unfortunate event that your equipment or vehicle is stolen or involved in an accident that results in a total loss.

Additionally, if you put a down payment on your loan or lease with Hitachi Capital Canada, we can protect the down payment for the initial 24 months in the form of a credit toward a future loan or lease with us, if a write-off occurs.


Our experts can help you choose the GAP or down payment protection plan that suits your needs. Contact us to find out more.