California Investigation of Wells Fargo and the Gap Insurance Issue

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Recently, I read an article in the Los Angeles Times related to the California investigation of Wells Fargo over unneeded auto policies—another in a series of issues the bank has had in recent times. Not only did Insurance Commissioner, Dave Jones, order the California Department of Insurance to investigate Wells Fargo, but now the bank is under investigation by the Federal Reserve Bank of San Francisco dealing with an issue related to GAP insurance and how the bank handled related refunds. Perhaps a little background may help you understand how GAP insurance came into existence and how relevant this should be to you as an insurance consumer.

It used to be that when you purchased a vehicle, you were required by the lending institution to make a sufficient down payment to keep your loan within a reasonable amount of the value left in the vehicle. Many times, based on the vehicle either being new or used, 20-30% of the value would be paid by the consumer upon purchase of the vehicle. You were required to have sufficient financial interest in the vehicle which would act as a motivator for you to meet the loan requirements. It seems that due to the ever-increasing value of vehicles, longer payment periods being allowed, institutional pressure to make loans, and companies seeking a competitive edge by reducing interest rates, vehicle resale values were not keeping pace with the loans outstanding on vehicles. Banks found this to be an area where they could step in, and with their large consumer base, offer a coverage which would span the difference between the value of the vehicle and the amount still owed against it. They could use car dealerships to offer this service, who in turn could market the GAP coverage to people purchasing new vehicles. If one were to explore this arrangement, it would not take them long to see the dealership making some kind of monetary return in the form of a percentage of the premium being charged for the GAP coverage: one can see why a car dealership would get involved. The motivation for the lending institution is the amount of premium being collected as opposed to claims being paid.

For the consumer, GAP is to cover car payments left if your car was totaled and insurance payout isn’t enough to pay off the loan. Even if your loan payments are for 72 months, the lending institutions really don’t have much of an actuarial possibility for loss. In addition, very few vehicles are totaled in proportion to number of vehicles damaged in a loss.

Insurance companies don’t mind providing GAP insurance, either, and most major companies have endorsements to existing policies. This coverage is by two separate endorsements: 1) New vehicle loan coverage endorsement, and 2) New vehicle additional coverage endorsement.

The first would have would have verbiage something like this…”our limit of liability for a covered total loss shall be increased to cover the interest of a lienholder in the vehicle which exceeds the actual cash value of the vehicle.” It would then give you the guidelines the company would use to handle the loss. One main guideline would be the spelling out of the maximum additional amount which would be paid over the actual cash value of the insured vehicle at the time of loss.

The second endorsement describes how the company will pay for the total loss to replace the vehicle without deductible for depreciation. They will also spell out exclusions to apply as well. Time limitation for ownership and miles driven are two common exclusions you will deal with.

The gripe the California Department of Insurance had stems mostly from the issue of policies where the loan was paid off early and with the reimbursement to the consumer for premiums being refunded for coverages no longer required and the duplication of existing coverages. The dealerships, lending institution (Wells Fargo), and insurance company (National General Insurance company) were being ambiguous as to who had responsibility for refunding premiums. In the event of duplicate coverages, who would actually be financially responsible to pay? All parties concerned indicate they want to be cooperative and take care of the consumer, so it will be interesting to see how this flushes out. These are the types of things which make it a real plus to us as a buying public to have a local agent, so we can have him or her show us where in our policy we do or do not have coverage. This is also a great way to help your agent earn the commission he or she is making from your premiums. Agents worth their professional title would feel it an honor to review your coverages and to answer any questions you may have.

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