If your leased car is totaled or stolen and not recovered, the lease ends. What you owe at that point depends on your insurance, your gap coverage, and the terms of your lease.

This is part of insurance for a leased car.

What happens, step by step

1. You report it. To the police, if relevant, to your insurer, and to your leasing company. Do all three promptly.

2. The insurer assesses the car. If repairs would cost more than the car is worth, or close to it, the insurer declares it a total loss.

3. The insurer pays the leasing company. Because the leasing company owns the car, the settlement goes to them, not to you. The insurer pays the car's actual cash value, its market value just before the loss, minus your deductible.

4. The leasing company works out the payoff. Your lease payoff is what it would cost to end the lease at that point. Early in a lease, it is usually higher than the car's actual cash value.

5. Any shortfall is covered, or owed. If the settlement is less than the payoff, the difference is the gap. With gap coverage, the gap is paid. Without it, you owe it.

6. The lease is closed. Once everything is settled, the leasing company closes the account.

What you may still owe

Even with gap coverage, some costs often land on you:

  • Your insurance deductible. Many gap policies do not cover it.
  • Missed or late payments, and any fees on them, from before the loss.
  • Negative equity rolled in from a previous car, on some gap policies. See trade in negative equity.
  • Any amount above the gap policy's limits.

What you generally do not get back

Your down payment. In a total loss it is usually gone. The settlement goes to the leasing company and a down payment is generally not refunded. This is the main reason to keep money down small.

A prepaid lease. On a one-pay lease, what happens to the unused portion depends on the contract and your coverage. Check before you sign.

Multiple security deposits are the exception. They are refundable, so they are usually returned once the account is settled, less anything owed. See multiple security deposits.

Keep paying until it is settled

This is the step people get wrong. Keep making your lease payments until the leasing company confirms in writing that the account is closed. Settlements can take weeks. Stopping early can mean late fees and missed payments reported on your credit, even though the car is gone. See does leasing a car build credit.

Any overpayment is normally refunded or credited once the claim is finalised.

If you disagree with the valuation

You can challenge the insurer's actual cash value figure. Gather listings for comparable cars in your area, with similar mileage and options, and send them to the adjuster. A higher valuation reduces any gap.

What next

Once the lease is closed you are free to lease or buy again. If you have gap coverage and the claim was clean, it should not affect your ability to get a new lease, subject to lender approval as usual.

The short version

When a leased car is totaled, the insurer pays its actual cash value to the leasing company, the lease ends, and gap coverage pays the shortfall if you have it. You may still owe the deductible and anything overdue. Keep paying until the account is confirmed closed.

If you want to check whether a lease you are considering includes gap coverage, send it to us.