What does "gap insurance" cover in relation to auto insurance?

Gap insurance specifically addresses the difference between what a borrower owes on their auto loan and the actual cash value (ACV) of the vehicle at the time it is declared a total loss, such as after a significant accident. This situation often arises when a vehicle is financed or leased, and the outstanding loan balance may exceed the vehicle's market value. In such scenarios, standard auto insurance payouts may not be sufficient to repay the loan in full, leaving the owner responsible for covering the remaining balance. Gap insurance helps prevent this financial burden by ensuring that the policyholder is not left with out-of-pocket costs due to depreciation of the car.