Getting into an accident is already a stressful enough experience on its own. But finding out that your car has been declared a total loss and that you still owe more on the loan than what the insurance company is willing to pay, well, that's a whole other level of frustrating.
This is a situation that is more common than most people realize, and it catches a lot of drivers completely off guard. The good news is that there are options that can be explored, and a car accident lawyer can help you understand what those options actually look like in your specific situation.
Why Insurance Doesn't Always Pay Off the Loan
Here's the part that trips most people up. When your car is declared a total loss, the insurance company doesn't pay off whatever balance is left on your loan. What they pay is something that is called the actual cash value of the vehicle, which is basically what your car was worth on the market right before the accident happened.
The problem is that cars lose value pretty fast. According to the Insurance Information Institute, a new car can lose somewhere between 15% and 20% of its value in the first year alone. So if you bought a car recently, financed a large portion of it or put very little money down, there's a real chance that what the insurance company says your car is worth is going to be less than what you still owe your lender.
That difference between the insurance payout and your remaining loan balance is what is known in the industry as the gap. And unless something is done about it, that gap is going to come out of your pocket.
What It Means to Be Underwater on a Car Loan
Being underwater on a car loan, which is sometimes called being upside down, just means that you owe more on the vehicle than it is currently worth. It's not a reflection of anything that you did wrong. It's something that happens pretty regularly, especially with newer vehicles, long loan terms, low down payments or situations where negative equity from a previous car was rolled into the new loan.
When a car that is in that position gets totaled in an accident, the math can get uncomfortable pretty fast. Let's say your car is valued at $18,000 by the insurance company but you still owe $23,000 on the loan. The insurer cuts a check for $18,000, which is typically sent directly to your lender. You're still on the hook for the remaining $5,000, and you no longer have a car to show for it.
That remaining balance doesn't go away just because the car does. Your lender is still going to expect to be paid.
What Gap Insurance Is and Whether You Have It
Gap insurance, which stands for Guaranteed Asset Protection, is coverage that is specifically designed to cover that shortfall between what the insurance company pays out and what you still owe on the loan. If you have it, it can take care of that remaining balance so you're not left paying for a car that's sitting in a wreck yard somewhere.
Whether or not you have gap insurance is something that is worth checking on right away if you haven't already done so. A few places to look:
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Your auto insurance policy declarations page, where it would show up as a separate line item or endorsement that was added to the policy
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Your original loan or lease agreement, especially if the vehicle was financed through a dealership
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Any paperwork that was signed at closing when you bought the vehicle, since some dealerships add it automatically at the time of purchase
If you do have it, the process of filing a gap claim is generally handled separately from your main insurance claim. A car accident lawyer can help make sure that both of those claims are being handled correctly and that nothing is being left on the table.
What If You Don't Have Gap Insurance?
If gap insurance isn't in the picture, you're not completely out of options. There are a few things that might still be worth exploring.
The first thing that is worth looking at is whether the insurance company's actual cash value assessment is accurate. Insurance companies use their own valuation methods and those methods don't always reflect what comparable vehicles are actually selling for in your area. You have the right to push back on the number that is given to you, and in a lot of cases that number can be negotiated upward.
Our post on negotiating a Los Angeles car accident claim with the adjuster goes into more detail on how that process works and why going into it without legal help often means that money is left on the table.
Second, if another driver caused the accident, their liability coverage may be what is responsible for your vehicle loss. Depending on the limits of their policy and the circumstances of the crash, that coverage could potentially cover the full value of what you lost, not just what your own insurer is willing to pay out.
How the At-Fault Driver's Insurance Fits Into This
California is an at-fault state when it comes to car accidents. What that means is that the driver who caused the accident is the one who is held responsible for covering the damages, and that includes the damage that was done to your vehicle.
If another driver was found to be at fault for the crash that totaled your car, their liability insurance is the policy that should be covering your loss. And that claim is separate from whatever your own insurance is doing. A car accident lawyer can help you pursue both of those avenues at the same time to make sure that every possible source of compensation is being looked at and pursued.
This matters especially when you are underwater on a loan. If the at-fault driver had sufficient coverage, it may be possible to recover an amount that actually covers the gap, not just the bare minimum that the insurance companies are trying to pay out.
What About the Injury Side of the Claim?
It's really worth mentioning that a totaled car is often just one part of a larger accident claim that needs to be addressed. If you were injured in the crash, that is a separate and equally important piece of what you are owed.
Medical bills, lost wages, pain and suffering and long-term impacts on your ability to work are all things that can be included in a personal injury claim that is filed against the at-fault driver. A car accident lawyer handles both the property damage side of things and the injury side so that the full picture of what you've lost is captured and presented properly, not just the value of the vehicle.
Our post on your guide to dealing with insurance after a car accident is a good starting point for understanding how the insurance process works from the moment after the crash and what mistakes are worth avoiding early on.
Steps to Take If Your Car Has Been Totaled and You Still Owe Money
The days right after a total loss declaration are important ones. A few things that can help protect your position:
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Don't accept the insurance company's first offer on the vehicle value without taking the time to review it carefully
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Pull comparable vehicle listings in your area to see if the actual cash value offer that was made is in the right ballpark
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Check your loan or lease paperwork to find out if gap coverage was included at the time of purchase
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Notify your lender about the total loss as soon as possible since they have a financial interest in the outcome
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Find out whether the other driver was found to be at fault and what their insurance coverage looks like
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Don't sign any release or settlement paperwork that is related to the vehicle until you understand the full picture of what is being signed away
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Talk to a car accident lawyer before finalizing anything, especially if you're facing a significant gap between what the insurer is offering and what you still owe
Talk to a Car Accident Lawyer Before You Accept Anything
A totaled car combined with a remaining loan balance is exactly the kind of situation where what is done in the first few days matters a lot. Insurance companies tend to move quickly on total loss claims and the paperwork that is put in front of you is designed to close things out in their favor, not yours.
A car accident lawyer can review the valuation that has been offered, look at whether there are additional sources of compensation that can be pursued and make sure that the vehicle loss is being handled in a way that doesn't come back to hurt you while the rest of the claim is still being resolved.
Steinberg Injury Lawyers has been helping injured people across Southern California deal with exactly these kinds of situations for decades. If your car was totaled in an accident and you're not sure where you stand, reach out to our team for a free consultation and we'll help you figure out what your options actually are.
