Quick, name a product you offer in F&I that terminates upon the first claim. Some of you old dogs may have immediately thought of credit life insurance. Given my time in the box back in the early ‘90s, I certainly would have. Heck, I even had a spinning tire in my office. It came complete with an ice pick I used to demonstrate the “rolling flat fixer” I had on my menu for a few months.
Today, our core products are vehicle service contracts (VSCs) and GAP, which sit in the lead positions on most F&I menus. Neither is a generic, one-size-fits-all solution, but for some reason, many dealers, F&I managers and even their agents and product providers tend to treat GAP that way. When I initially approach a potential dealer client, I am often asked, “So, how much is your GAP?”
As with VSCs, the answer depends upon a number of factors. First and foremost is the amount financed, but there are several additional factors to consider when pricing your GAP offering.
For the purposes of this article, we will limit our discussion to the differences among GAP waivers. I understand that GAP insurance is still available in a couple of states. Much of the information to follow will also apply to GAP insurance, but there may be some important considerations that do not apply. While I am making disclaimers, let me also state that I am not an attorney, so I am not offering legal advice.
One of the important differences among GAP waivers is the definition of actual cash value (ACV), which can vary greatly. Since this amount, along with the loan balance, determines the GAP benefit, it is very important you understand the difference. Here are some common definitions you may see on a GAP waiver certificate:
- Definition One: The retail value determined by the primary insurance carrier on the date of loss, a.k.a. “settlement gap.”
- Definition Two: The retail value (or sometimes the average of wholesale and retail value) at the time of loss as determined by a national or regional used-car guide, which may not be specifically named. This definition is commonly used to establish a value if there is no physical damage policy in force. You may want to make sure this clause is included in the waivers you offer.
- Definition Three: A variation of the first two definitions, often described thusly: “No consideration will be given to deductions made to include, but not limited to, prior damage, condition adjustments, towing, and possibly some other conditions listed.” Pay particular attention to the “condition adjustments” clause. If the customer drove more miles than an average driver, his insurance settlement would be reduced for those excess miles. That reduction would not be considered as part of the GAP benefit.
To illustrate how the different definitions could impact the benefit, let’s use an example of a loan with a net payoff — after refunds for cancelable products — of $15,000. And let’s say the primary insurance carrier settles with the insured for a value of $10,000. Provided all other conditions of the waiver are met (additional possible conditions are mentioned in the next section), a contract with Definition One would pay a GAP benefit of $5,000. Now let’s suppose, using either Definition Two or Three, that the collateral’s value was determined to be $12,000. In that case, the insured could face the dreaded “double gap.” The waiver would only cover the $3,000 difference between the loan balance and the ACV as determined by the contract, and your customer would be responsible for the remaining $2,000.
Conditions, Limitations and Exclusions
As with any contract, there will be many other considerations. These conditions, limitations and exclusions will vary among GAP providers. Although there are too many to list, we can discuss a few of the more common ones. Many are self-explanatory, and until I read some recent headlines, I thought they were obvious. Of course, contracts have some common exclusions such as fraud, misrepresentation and deliberate acts. Here are my Top 10, so to speak:
Maximum amount financed (Typically $100,000)
Maximum value of collateral (Also typically $100,000, but not to be confused with No. 1)
Maximum GAP benefit (Typically $50,000, but during the bad old days of huge overadvances, I saw GAP payments of more $30,000. Those days seem to be returning)
Maximum loan-to-value (LTV) ratio (Typically 125% or 150%, but some contracts have no LTV limit as long as the first payment is due within 90 days of purchase.)
Maximum term (Terms longer 72 or 84 months could truncate the coverage or, more likely, exclude and void the contract)
Maximum APR (A useful way for GAP providers to limit their risk)
Commercial use limitation (Some providers offer an addendum for an additional charge)
Vehicle limitations (Typically by gross vehicle weight rating and certain models)
Loan type (May exclude leases or balloon payment loans)
No. 10 is a tricky one, because not all administrators allow the dealer to reinsure their GAP waivers. Many dealers have asked me whether they should include GAP in their dealer-owned reinsurance companies. I respond by asking whether they think the administrator is making a profit. “Of course they are,” they say, assuming they are properly underwritten. There seems to be a direct correlation between dealers who have been told they shouldn’t reinsure their GAP and the GAP provider’s reluctance to reinsure it. By the way, that is the same answer I give when they ask if they should reinsure their high-mileage VSCs.
There are many more limitations to consider, such as whether and how much of the insured’s deductible is covered. Most contracts today do not cover late payments or other variations from the original amortization schedule. So consider that when your lender gives you that holiday “gift” of allowing you to skip a payment. And they specifically mention that payments need to be kept up during the claim process. Finally, you need to know how soon a claim needs to be filed in the event of a loss.
Termination at Time of Claim
Another important consideration when selecting a GAP waiver to offer your customers is how the contract terminates at the time of claim. Administrators have two choices: They can cancel the contract or earn the contract at time of claim. If the contract is cancelled at time of claim, it is treated just as if the customer has traded or sold the collateral.
As agents and dealers, we know what that means: The unearned commission is charged back. So, worst case scenario, a dealer sells a GAP policy to a consumer for $895. The vehicle is stolen and not recovered a couple of months later. The dealer is charged back almost all of his profit. The other option the GAP administrator has is to fully earn, not cancel, the contract at time of claim. In this case, as you may already have surmised, there is no refund and thus no chargeback. This type of contract termination usually has a 6% to 9% premium increase. Many administrators give you the choice because they offer both types of termination options.
So what type of GAP waiver are you offering? Of course you should be able to ask your F&I partner, whether it is an agent, an administrator or your OEM. But ultimately, as with any product for which some assembly is required, the old adage holds true: If all else fails, read the directions.
George Spatt is the owner of GEMS, an F&I agency, and a 40-year automotive industry veteran. Contact him at [email protected].