How GAP Protects Consumers
The intent of this article series is to provide the reader with accurate and helpful information on a voluntary protection product called GAP waiver. This blog describes some of the consumer protections built into the product and the compliance framework.
Readers should know by now that Guaranteed Asset Protection Waivers (GAP waivers) are a voluntary product offered by dealers and lenders to car purchasers to cover all or part of the remaining loan balance when a financed vehicle is a total loss or unrecovered theft. If this is news to you, we’d encourage you to read our GAP 101 blog. By helping protect consumers from making payments on a car they no longer have, GAP waivers are ultimately helping consumers protect their household finances. There’s a high need for GAP waivers, and consumers love the product.
As the leading national trade association for GAP waivers, our mission is to assure a viable market with consistent compliance requirements that are balanced with consumer protections. Businesses operate more effectively and efficiently where there is certainty and predictability. To that end, GAPA has been working with state policymakers for years to enact the GAPA Model Act. As of April 2025, 27 states sprinkled throughout the country have adopted some form of the GAPA Model Act. This model legislation includes consumer protections through a mandatory free-look period, consumer disclosures and financial assurance.
Let’s take a closer look at how these protections work.
Free-Look
In our previous blog on consumer value, we described how a GAP waiver is an optional protection product available to almost anyone, and the cost can be conveniently financed with the vehicle.
One consumer protection design element often overlooked by policymakers is the importance of the “free-look.” This is the period (typically 30 days) in which consumers can receive a full refund of the GAP waiver fee if they cancel the product within that timeframe. In this way, consumers are protected from potential buyer’s remorse. After all, purchasing a new vehicle is often a large financial commitment for consumers with lots of decisions to make. Requiring a free-look period ensures consumers can reflect on their own financial needs and assess whether a GAP waiver is right for them outside the vehicle transaction.
Consumer Disclosures
The GAPA Model Act also includes protections for consumers via disclosures, ranging from pricing to cancellation to claiming benefits and more. In states where the act has become law, the GAP waiver contract must disclose, in “clear, understandable language that is easy to read,” these notable items:
- The name and address of the initial creditor and the borrower at the time of sale, and the identity of the GAP administrator if different from the creditor
- The purchase price
- The terms of the GAP waiver, including without limitation, the requirements for protection, conditions, or exclusions
- Cancellation and refund provisions, including the free-look period and thereafter, and the methodology for calculating any refund due
- The procedure to obtain benefits under the terms of the GAP waiver
- Sellers cannot make borrowers purchase a GAP waiver as a precondition to get their financing
With this robust list of required disclosures, borrowing consumers understand what they are purchasing, which is good for all parties.
Financial Assurance
For all GAP waivers offered by a retail seller like automobile dealers, a special insurance policy called a Contractual Liability Insurance Policy, or CLIP, is required as financial backing for the GAP waiver consumer contract. If the borrower’s financed vehicle is stolen and unrecovered or damaged to the point it is a total loss, the lender waives all or part of the remaining balance according to the terms of the GAP waiver and then gets reimbursed from the CLIP insurer.
The CLIP is issued to the auto dealer as the initial creditor, and the CLIP form and associated premium rates are filed with and regulated by state departments of insurance. Importantly, while the CLIP is issued to the selling dealer, when the dealer sells the loan (with a GAP waiver) to a subsequent creditor like a bank, credit union or finance company, the GAPA Model Act requires that the CLIP provides coverage to that subsequent creditor. That is, the CLIP moves as the GAP waiver moves. If a subsequent creditor then sells the loan and GAP waiver to another creditor (subsequent creditor #2), the CLIP provides coverage for subsequent creditor #2. As a result, the obligation to cover the GAP waiver always stays with the loan, and reimbursement of the waived amount ensures creditors fulfill the GAP waiver obligations to consumers.
As you can see, the financial assurance of a fully filed insurance policy provides the financial backing for the promises made in GAP waivers. Ultimately, consumers can rest assured there is a financial backstop in the event they experience a covered loss under their GAP waiver.
GAPA will continue to work with states to implement the GAPA Model Act, ultimately to the benefit of consumers. The requirements in the legislation benefit consumers by weeding out bad actors and establishing clear standards for the products. Fortunately, being able to tell policymakers that 9 out of 10 consumers would purchase a GAP waiver again and recommend it to others is a very strong data point that helps advance our mission.
We hope you found value in this latest blog. Next month, we’ll come at GAP waiver from a process perspective.
GAPA is the leading national trade association for GAP waiver and similar products. For almost 20 years, GAPA has been working with policymakers nationwide to forge a path where there is statutory certainty for industry, the market is viable, and consumers are afforded protections. We are the leading voice for this market, having engineered and shaped applicable statutory and regulatory frameworks.
Please direct any questions or feedback to Travis Moore, GAPA General Counsel: moc.imapp@sivart.