Legal Definitions - involuntary gap claim

Involuntary Gap Claim

An involuntary gap claim refers to a demand for payment or compensation made when there is a financial shortfall (a "gap") between the value of an asset and the amount still owed on it, and this shortfall arises from an unexpected event that was beyond the claimant's control. It typically involves seeking to cover the difference between an insurance payout (or asset recovery) and the remaining debt after such an event.

Here are some examples:

• Vehicle Total Loss: Imagine a person finances a new car. A few months later, the car is involved in a severe accident, declared a total loss by the insurance company, and the accident was not the driver's fault. The insurance company pays out the car's current market value, which, due to depreciation, is less than the remaining balance on the car loan. The difference between the insurance payout and the outstanding loan is the "gap." The driver, or their gap insurance provider if they have one, would make an involuntary gap claim to cover this remaining debt, as the accident was an unforeseen and uncontrollable event.
• Property Damage from Natural Disaster: Consider a small business owner whose commercial building is heavily mortgaged. A sudden, severe hurricane causes extensive damage to the property, making it uninhabitable. The business's property insurance policy covers the damage, but the assessed value for repairs or rebuilding provided by the insurer is less than the outstanding mortgage principal. The business owner, or the mortgage lender, might pursue an involuntary gap claim to recover the remaining mortgage debt that the insurance payout did not cover, as the hurricane was a natural disaster beyond their control.
• Theft of Financed Equipment: A construction company purchases a specialized piece of heavy machinery using a loan. One night, the equipment is stolen from a secure job site. The company files a claim with its insurance provider, which pays out the depreciated market value of the stolen machinery. If this insurance payout is less than the remaining balance on the equipment loan, the construction company or the lender could make an involuntary gap claim to cover the outstanding debt, as the theft was an unexpected and involuntary loss of the asset.