I often receive phone calls about liability insurance carriers not wanting to pay for all of the debt associated with a motor vehicle that has been totaled. According to Arkansas’s jury instructions, the liability insurance carrier must only pay the difference in fair market value immediately before and immediately after the wreck. See AMI 2210. Fair market value is defined as “the price the [motor vehicle] would bring on the open market in a sale between a seller who is willing to sell and a buyer who is willing and able to buy after a reasonable opportunity for negotiations.” See AMI 2221. The amount the vehicle owner owes is irrelevant to the market value of the vehicle.
If your vehicle is totaled, you owe $10,000 on the vehicle, and the fair market value of the vehicle is $8,000, then you are upside down $2,000. Stated differently, there is a gap of $2,000. This is where good gap insurance coverage comes in handy. A well written gap insurance policy will cover the $2,000 you are upside down on the vehicle. As with most types of insurance coverage, there are good policies and bad policies. When purchasing gap insurance, you must read the fine print to determine whether you are paying for a policy that covers the outstanding debt on the vehicle or only the fair market value. As discussed in the first paragraph, the liability insurance carrier is required to pay the fair market value of the vehicle so gap insurance that only covers the fair market value is of limited benefit to the consumer. For more information on how gap insurance works and the type of policy you need, check out the following link from the Arkansas Attorney General’s Office: https://arkansasag.gov/programs/consumer-protection/my-vehicle/gap-insurance