What Happens When a Leased Car Is Totaled?

What Does It Mean for a Car to Be Totaled?

When a vehicle is totaled, the cost of repairs exceeds a significant percentage of the car’s value, typically between 70% and 80%. At this point, your agent deems it more economical to issue a payout based on the actual cash value (ACV) or value of the vehicle rather than cover the total cost of repairs. This decision marks the vehicle as a totaled vehicle.

The process can become even more complicated for those involved in a leased vehicle accident. While the car is beyond repair, your financial obligations to the leasing company don’t disappear. Leaseholders remain responsible for paying off the residual value of the car lease. This is where car insurance and, more importantly, gap insurance come into play to cover the difference between the payout and the lease balance. Without proper coverage, you could be on the hook for the remainder of the lease even though the car no longer exists.

Additionally, you might face more than just property damage in an accident. Things can get even more complex if a personal injury lawsuit, medical bills, or bodily injury liability coverage is involved. It's crucial to ensure you’re in a safe spot both legally and financially after the incident, so consulting with a personal injury attorney may be essential if navigating significant injuries or the accident location becomes relevant in your case.

Insurance Coverage for a Totaled Leased Car

Collision and comprehensive insurance

Leasing companies typically require lessees to have full coverage, including collision and comprehensive coverage. Collision insurance covers damage to your car in the event of an accident, while comprehensive insurance covers damage caused by theft, vandalism, or natural disasters.

When your leased car is declared totaled, these coverages will pay out the actual cash value (ACV) of the vehicle at the time of the accident. The ACV is the car's market value, taking into account depreciation. This means the amount you receive will likely be much less than the car's original value when it was new.

Unfortunately, this payout may not cover what you still owe on your lease contract, especially if the vehicle significantly depreciates during the lease term.

The role of gap insurance

Gap insurance is an optional but highly valuable coverage that helps protect leaseholders or car owners in the event of a total loss. The term “gap” refers to the difference between the car’s actual cash value (ACV)—what the company determines the car is worth at the time of the accident—and the amount still owed on the lease or loan. This difference can be a significant financial burden without gap, especially for those leasing a vehicle.

How gap works after a total loss

If your leased car is involved in a severe accident and declared a total loss, your standard auto insurance will only cover the vehicle's ACV. This value is calculated based on the car’s market value, considering depreciation over time. Vehicles typically lose value rapidly, particularly within the first few years of leasing or ownership. As a result, the ACV your insurance company provides is often much lower than the amount you still owe on the lease or loan.

This is where gap insurance steps in. After the accident, gap insurance will pay the difference between the ACV provided by your standard policy and the remaining amount you owe on the lease. For example, if your car is valued at $18,000 at the time of the accident but you still owe $25,000 on the lease, gap insurance will cover the $7,000 shortfall. This prevents you from paying out-of-pocket for a car you no longer have.

Why gap is essential for leaseholders

Leased cars tend to depreciate faster than the payments made throughout the lease. This means that in the early stages of the lease, the balance owed on the car will often exceed its actual market value. If you don’t have gap insurance and your car is totaled, you may have to pay off the remainder of the lease out of pocket despite no longer having the vehicle.

Gap insurance is especially critical for leaseholders because:

• Covers depreciation: Cars lose value quickly, and gap insurance ensures you aren’t left paying for a vehicle worth less than you owe
• Prevents financial strain: Without gap, you could be responsible for paying thousands of dollars to your leasing company after an accident
• Offers peace of mind: Knowing you’re covered for any financial gaps gives you greater security when leasing a vehicle

How to know if you have gap insurance

Many leasing companies automatically include gap insurance in the lease agreement as part of the deal, but some may offer it as an optional add-on. It’s important to check your lease contract or ask your leasing company whether gap insurance is included. If it’s not, you can often purchase gap insurance from your auto insurer or a third-party provider.

What happens without gap insurance?

If you do not have gap insurance and your leased car is totaled, you could be responsible for a large out-of-pocket expense. This happens because your insurance will only cover the car’s actual cash value, not the amount you still owe on the lease. Since leased vehicles tend to depreciate quickly, the difference between the ACV and your lease balance could be substantial.

Here’s an example: let’s say your leased car’s ACV is $20,000, but you still owe $26,000 on your lease. You must pay the $6,000 difference out of your pocket without gap insurance. This is why gap insurance is crucial for leaseholders—it protects you from covering such a large deficit in case your car is totaled.

If you don’t have gap insurance and your car is totaled, you should immediately contact your leasing company to discuss payment options for the remaining balance. Some companies may offer payment plans, but in most cases, the full amount will be due.

Additional Costs: Excess Mileage & Wear-and-Tear Fees

Even if your car is totaled, certain lease-related costs may still apply. Many lease agreements contain clauses about excess mileage and wear and tear. These clauses don’t disappear when the car is declared a total loss. For example, if you exceeded the mileage limit specified in your lease contract or if the car had more wear and tear than is normal, you may be responsible for paying these fees, even though the vehicle is no longer drivable.

It’s essential to carefully review your lease agreement to understand what fees you may still be liable for. The insurance company will not cover these additional costs, so it’s up to you to settle them with the leasing company.

Legal Rights & Responsibilities of a Leaseholder

When a leased car is totaled, the leaseholder still has certain legal obligations to the leasing company. Most lease agreements will have specific provisions detailing what happens in the event of a total loss. It’s important to familiarize yourself with these clauses before an accident occurs so you’re not caught off guard.

After the insurance company declares the car a total loss and pays out the ACV, the leaseholder will be responsible for settling the remaining balance on the lease. If you have gap insurance, it will cover the difference. Without gap insurance, the leaseholder will be liable for any outstanding amount the insurance doesn’t cover.

If you believe that the insurance company’s payout for the vehicle’s ACV is too low or that the lease payoff amount is incorrect, you can dispute these figures. In such cases, consulting a legal professional or a financial advisor can help you navigate your options and ensure you’re not paying more than you owe.

Can You Lease Another Vehicle After a Total Loss?

If your leased car is totaled and you’ve resolved the financial aspects of the accident, you may want to lease another vehicle. Leasing a new vehicle after a total loss is entirely possible, but there are a few factors to consider.

If you didn’t have gap insurance and were forced to pay the remaining lease balance out of pocket, this could affect your ability to lease another car, especially if it strains your finances. Additionally, an accident resulting in a total loss may raise your policy premiums, increasing the cost of leasing your next vehicle.

However, if gap insurance covers the remaining balance and the process is resolved smoothly, transitioning into a new lease should be relatively straightforward. Leasing companies may also review your accident history when deciding whether to approve a new lease, so it’s a good idea to check your credit and insurance standing before pursuing a new lease agreement.

Conclusion

Having a leased car totaled can be a stressful experience, but understanding your coverage and your lease agreement will help you navigate the process more easily. Gap coverage is critical to protecting yourself financially in the event of a total loss, as it covers the difference between the car’s actual cash value and the remaining lease balance. Without it, you may be stuck paying thousands of dollars out of pocket.

Before you lease a car, ask whether gap is included or if you need to purchase it separately. It’s a small investment that could save you from major financial strain. And always review your lease agreement carefully so you’re fully aware of your responsibilities if your car is declared a total loss.

Finding the right personal injury lawyer can feel overwhelming, but YourAccident.com simplifies the process. We offer access to a vast network of skilled car accident attorneys with expertise in auto accident cases and a history of successfully negotiating with insurance companies. Our attorneys handle every aspect of your case, from gathering medical records to guiding you through each step of the claims process, ensuring you receive the support and legal representation necessary for your situation.

For more insights, visit our blog, where we provide valuable resources to guide you through important topics such as the legal framework regarding car accidents and insurance information. You can also use our settlement calculator to estimate potential compensation amounts based on your specific circumstances.