What does "gap insurance" cover in relation to auto insurance?

Gap insurance is specifically designed to cover the difference between the actual cash value of a vehicle at the time it is totaled or stolen and the outstanding balance on the vehicle's loan. When a vehicle is financed, it often depreciates faster than the loan is paid down, creating a potential financial gap that the insured may need to cover if an accident leads to a total loss. This situation is where gap insurance plays a critical role; it ensures that the policyholder does not face the burden of paying for a vehicle that is no longer in their possession while still having an active loan to pay off.

The other options do not accurately represent what gap insurance is intended for. While the cost of repairs following an accident is typically covered by standard auto insurance, that is not the function of gap insurance. Likewise, expenses related to depreciation, while relevant in determining a vehicle's actual cash value, are not the focus of gap insurance. Lastly, liability for injuries caused to other parties is covered under liability insurance, which is separate from the type of financial protection provided by gap insurance, further emphasizing the specific role that gap insurance serves in the context of auto loans and total losses.