Questions continue to come to me about the distinction between Guaranteed Asset Protection (GAP) Waivers and Guaranteed Asset Protection (GAP) Insurance.

GAP Waivers are not insurance. In Alabama, they are addressed at Section 8-37-1 et seq. Code of Alabama. Other states have similar laws. The requirements with respect to the sale and financing of GAP Waivers addressed in the Alabama Code, include disclosure requirements, cancellation requirements, and obligation of the seller to “insure its GAP waiver obligations under a contractual liability or other insurance policy issued by an insurer.” This means that a retailer or creditor cannot “self-insure” its GAP Waivers. A seller or creditor may not require a GAP Waiver as a condition of credit. 

GAP Insurance is addressed in the Alabama Department of Insurance Regulations at Chapter 482-1-111. It most definitely is insurance. Most states have similar laws and regulations addressing GAP Insurance. Alabama’s regulations make clear that commissions on the sale of GAP Insurance may only be paid to sellers, if they are licensed insurance producers. 

So, a seller or creditor may offer either a GAP Waiver or, if licensed and acting for an insurer, GAP Insurance. It is my understanding that neither product may be required as a condition for the extension of credit. That is, either product offered to a consumer, must be offered on a voluntary basis. 

The GAP Waiver’s price is, in part, dictated by the insurance company that “insures” the GAP waiver obligations of the seller. The GAP Insurance price is subject to an accepted filing by the insurance company with the Alabama Department of Insurance. 

Significantly for our purposes, both GAP Waivers and GAP Insurance may be financed in a consumer credit transaction and are not to be considered a finance charge or interest. Having said this, creditors should be exceedingly careful about disclosing the product that is sold—properly identifying it as either a GAP Waiver or GAP insurance. The two are not interchangeable and the failure to properly disclose which product is involved in the transaction may be a Truth-In-Lending Act violation.

Please Note: This is the two hundred-forty-third blog in a series ofBack to Basics blogs, in which relevant and resourceful information can be easily accessed by clicking Dentons - Consumer Finance Report.