When you buy a commercial truck, it begins to depreciate in value the moment you start driving it. This shouldn’t matter to you since as an owner operator, your intention is to make a living by hauling cargo with it. However, problems can happen if you suffer a total loss of your rig because of an accident, theft, a fire, or a windstorm. Even if you have both collision and comprehensive insurance, you may still owe money on your lost rig even after you have collected from your insurance policy.
The reason for this is depreciation. If you financed your truck, it is possible that the amount of money you still owe to the lender is more than the rig’s market value at the time of its loss. The collision and comprehensive policies only pay for the truck’s market value. If what you still owe to your lender is more than its market value, then the difference between what you get from your insurance policy and what you still owe to your lender will have to come out of your pocket.
If at the time of your tractor-trailer rig’s loss, its market value was $100,000 then your insurance would pay you this amount less your deductible. However, suppose you still owe your lender $120,000. After paying your lender the money you collected from your insurance policy, you would still owe:
$120,000 – ($100,000 – Deductible) = $20,000 + deductible
This is money you owe for a rig that you no longer have. This debt can be a real hardship considering that you as an owner operator will need to get another rig. However, GAP insurance will cover this debt. In other words, GAP insurance will pay the difference between the cash value of your rig and the outstanding balance on your lease or loan.
Whether your rig’s market value stays above or below what you owe your lender, will depend on the size of your down payment, how long the financed period lasts, and the rate of depreciation for the type of tractor and trailer that you bought. A bigger down payment and a shorter financing period are always better if you can afford it. Otherwise, you can get GAP insurance.