While the leasing company owns your leased car, you are responsible for keeping the car in one piece and returning it at the end of the lease. This is why the leasing company requires you to carry full coverage auto insurance and requires you to pay the lease balance to get out of the contract if the car is wrecked and not reparable.
The Dreaded Upside Down Totaled Car
An auto insurance company will pay the cash value of a totaled car, which is what it would cost to buy the same car as a used car from a dealer. Unfortunately, your used lease car has a market value worth much less than the new price, and the payoff amount on a lease does not drop as fast as the car's value does. Typically, when a lease car is totaled, the lease payoff will be higher than the amount the insurance will pay for the car. Sometimes the difference can be thousands of dollars that you need to come up with to pay off the lease.
Gap Insurance Covers the Shortfall
Gap insurance is the type that pays the difference between the lease payoff amount and the regular insurance coverage value when a leased car is totaled. Some lease contracts automatically include gap coverage, so check your lease paperwork if your car is wrecked to determine if the leasing company will cover the gap. If you have leased and did not buy gap coverage or have it included in the lease, you can buy gap coverage at any time directly from insurance companies and brokers. Gap insurance must be purchased before the leased car is wrecked, however.
- Edmunds: Gap Insurance -- How It Impacts Your Car Loan or Lease
- GEICO: It's Totaled. What Happens Now?
- Kiplinger. "Five Myths About Leasing a Car." Accessed Aug. 15, 2020.
- Nolo. "Car Leasing: Maintenance, Repairs, and More." Accessed Aug. 15, 2020.
- Internal Revenue Service. "Publication 463 (2019), Travel Gift, and Car Expenses." Accessed Aug. 15, 2020.
- Edmunds. "Looking to lease? Read our car leasing basics." Accessed Aug. 15, 2020.
Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.