I have some clients who recently fell into a hole in their GAP Policy. Here’s what happened:

They bought a new car in October, 2007 and purchased a GAP policy with it. The policy is, of course, designed to cover any gap between what they owe on the car and the replacement value of the car in case the car is in an accident. Since cars depreciate faster than you pay them off, GAP policies are useful when you are purchasing a new car with little or no money down (otherwise they can be a waste of money).

My clients car was destroyed in January of 2008 and there was a $4,000 gap. The policy holder (Stonebridge Casualty Insurance Company) refuses to pay for the gap coverage. The reason? My clients refinanced the car with their own bank in January.

The lesson: Shop for the best rates before you buy the car, and if you have already bought the car, check your GAP policy before you refinance.