Is Gap Insurance Required in California?

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Guaranteed asset protection is an optional type of auto insurance that may be obtained as a policy endorsement from a traditional insurer or a gap waiver from a car dealership or other financial institution in California. Gap insurance can make up the difference between the actual cash value (ACV) of your car and your outstanding loan balance if your vehicle is ever declared a total loss.

Keep reading to learn how you can get gap insurance in California and what rules the state has set surrounding the sale of guaranteed asset protection products.

Key Takeaways

  • Gap insurance covers the difference between the actual cash value (ACV) of your vehicle and the outstanding debt on your auto loan if your car is totaled or stolen.
  • Dealers and lenders may instead sell gap waivers agreeing to cancel any debt that exceeds your insurance payout after a total loss, although gap waivers are heavily regulated in California.
  • California law does not require you to purchase gap insurance and a dealer or lender can’t make you sign a gap waiver to finance your vehicle.
  • You may benefit from gap insurance coverage if you plan on buying a new vehicle with a low down payment and an extended financing period.
  • Gap coverage typically costs $20 per year as a car insurance endorsement but may cost more if you go through a financial institution other than your insurance carrier.

Is Gap Insurance Required in California?

California drivers are not required by law to purchase gap insurance nor are they required to pay to enter into a similar agreement known as a gap waiver. In fact, lenders and dealers in California are not allowed to require gap waivers as a condition for financing nor can they consider your decision not to buy a gap waiver when setting the terms of a financing contract.[1]

In addition, a financial institution is not allowed to sell you a gap waiver at all if you are taking out a loan for less than 70% of the retail price of the vehicle you are buying.[1] To be eligible to purchase gap coverage, you will likely need to have comprehensive and collision coverage and your car may need to be under a certain age.[2]

How Does Gap Insurance Work in California?

Gap insurance can make up the difference if your car is declared a total loss and its actual cash value (ACV) is less than the amount you still owe to your lender. If your car is stolen or damaged so severely that it would cost more than the car is worth to repair it, your insurance provider will pay you the vehicle’s ACV as long as you have comprehensive and collision coverage. This means your insurer will take depreciation factors like your vehicle’s age or wear and tear into account and subtract some money from your payout.

If the ACV of the lost vehicle is less than the amount you still owe on your car loan, gap insurance can help you pay off the loan.

For example, if you total your car while it is worth $20,000 but you still owe your lender $25,000, you could receive $20,000 minus your deductible through your collision coverage and $5,000 through your gap insurance.

actual cash value and gap car insurance coverage illustration

Although gap insurance won’t pay to buy you a new car, it can at least keep you from having to pay off a loan for both a vehicle you no longer have and its replacement. Keep in mind that this coverage type only applies if your vehicle can no longer be driven, meaning it won’t help you pay off your auto loan if your car incurs damage that can be fixed at a reasonable price.

What Is a Gap Waiver?

While you can get gap insurance through a traditional insurance company as an add-on to your car insurance policy, a gap waiver is a similar coverage type that is usually sold by car dealerships and lenders in California. When you pay for a gap waiver, your lender agrees to cancel any outstanding debt if your car is totaled and its ACV is not enough to finish paying off the loan.[3]

Whether you opt for an insurance endorsement or a waiver, gap coverage is most useful if you have a new vehicle rather than an older, used car. New cars generally depreciate in value by 20% within a year and by 60% within five years.[4] As a result, it’s more likely that your loan balance will exceed the ACV of your car at some point when you buy new rather than used, especially if you made a low down payment or financed over a long period of time.

California Gap Insurance Laws

The California State Legislature regulates the sale of gap waivers in numerous ways. For example, anyone who sells you a gap waiver is required to inform you if you are unlikely to benefit from gap coverage due to there being a minimal difference between the value of your loan and the ACV of your vehicle.[1]

In addition, state law mandates that anyone who buys a gap waiver must be able to cancel it at any time without having to pay a penalty. If you cancel within 30 days of purchasing a gap waiver, you are entitled to a full refund. Meanwhile, if you cancel it after more than 30 days, you are entitled to a prorated refund.[1]

How Much Does Gap Insurance Cost in California?

Usually, gap insurance costs around $20 per year as an auto insurance endorsement.[5] That said, certain will factors will influence the precise impact gap insurance has on your car insurance premium such as your car’s age and your claims history.

The price of gap coverage is often higher if you go through an alternative financial institution.

For example, California residents with ties to the United States military can get gap insurance from Navy Federal Credit Union for a lump-sum payment of $399.[6]

If you buy a gap waiver, California law dictates that it cannot cost more than 4% of the value of your loan.[1] For example, if you take out a $40,000 loan to finance your car, then the maximum amount your lender can charge you for a gap waiver is $1,600.

Companies That Offer Gap Insurance in California

The following car insurance companies operate in California and either sell gap insurance or a similar coverage type:

  • Allstate
  • Farmers
  • The Hartford
  • Liberty Mutual
  • Nationwide
  • Travelers
  • USAA

If you opt to buy gap coverage from a bank or dealership instead, you will likely end up paying more for coverage. However, these financial institutions may offer gap insurance that will cover your comprehensive or collision deductible, which we won’t be covered by gap insurance from a traditional insurance carrier.[2]

How Do I Get Gap Insurance in California?

The first step to finding gap insurance in California should be acquiring quotes from three to five different insurance providers. These companies will request information like your driving record, date of birth and driver’s license number, along with details about your vehicle like its age or make and model.

To simplify the process, you can take advantage of an insurance marketplace like SmartFinancial. Instead of contacting insurers individually and providing your information multiple times, you can fill out our online questionnaire once and we’ll direct you toward insurance agents in your area who can get you a policy that includes gap coverage and matches your other coverage needs. Enter your zip code below and we can help you obtain an auto insurance quote free of charge.

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Is gap insurance taxable in California?

In general, insurance expenses are not subject to California’s sales tax.[7]

Who should buy gap insurance in California?

Gap insurance will be most helpful for you if you bought a highly valuable vehicle that will depreciate quickly, made a small down payment and/or financed your vehicle over a period of several years.

Are there limits on gap insurance in California?

California dealers and lenders may set coverage limits for gap waivers based on a loan-to-value ratio, which is the value of your loan divided by the ACV of your car.[1]

Do I need gap insurance if I have full coverage?

Full coverage does not automatically include gap insurance, so you will need to buy this coverage type separately if you want to be insured in case your car gets totaled and its ACV is less than your loan balance.

Is gap insurance the same as new car replacement insurance?

Gap insurance will only help you pay off a loan that you took out on a now-totaled car, while new car replacement insurance can help you buy a new car that is similar to the one that was totaled.


  1. California Legislative Information. “Assembly Bill 2311.” Accessed August 15, 2023.
  2. Kelley Blue Book. “What Is GAP Insurance: Everything You Need To Know.” Accessed August 15, 2023.
  3. Guaranteed Asset Protection Alliance. “GAP Waiver Model Act,” Page 1. Accessed August 15, 2023.
  4. Kelley Blue Book. “How To Beat Car Depreciation.” Accessed August 15, 2023.
  5. Insurance Information Institute. “What Is Gap Insurance?” Accessed August 15, 2023.
  6. Navy Federal Credit Union. “Guaranteed Asset Protection (GAP).” Accessed August 15, 2023.
  7. Legislative Analyst’s Office. “Understanding California’s Sales Tax.” Accessed August 15, 2023.

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