VEHICLE LEASES | GAP insurance covers the difference in value between the sum insured of a comprehensive car insurance policy as on the date of the agreement and the insurance payout amount.While the number of car accidents and thefts has been declining, in the case of leased vehicles, there is still the issue of total loss or vehicle theft. In such cases, lessees are caught off-guard when their leasing companies ask them to continue to make their leasing payments even though the leased asset is no longer there. The greatest impact will be felt by customers who have opted for operating leases with a low residual value, expecting to purchase the vehicle at a low price once the payments are completed. The lowest risk is assumed by customers leasing motor vehicles. However, in both cases, the leasing company will demand repayment of all the payments from which no VAT can be deducted because the subject of the agreement is no longer there.The payout goes to the ownerWhat do lawyers say about the customers’ position? Bartłomiej Bronisz, an attorney at the Department of Financial Institutions and Restructuring at the law offices of FKA Furtek Komosa Aleksandrowicz, admits that insurance payouts in the event of loss of the leased asset are one of the most contentious lease-related issues in Poland. “As a rule, the provisions of the Polish Civil Code (Article 7095) stipulate exclusively that in the event of loss of an asset (to theft or following a total loss), the lease agreement expires and the lessor may demand immediate repayment of the outstanding leasing payments, Bronisz explains. The remaining leasing payments should be reduced by the amount of benefits derived by the lessor from their being repaid earlier than agreed and from insuring the asset. “The purpose of this stipulation is to protect the payout due to the lessor as it is designed to include the price of the asset being acquired. Bronisz explains that if the lessor did not receive the remaining leasing payments, it would incur a loss by not receiving a refund of the funds that were applied towards the purchase of the leased asset. In practice, most vehicle leases stipulate that the lessee is required to insure the leased asset in favour of the lessor. “This stems from the fact that throughout the term of the lease, the lessor remains the owner of the asset and, under law, it is the lessor that suffers a loss if the asset is lost or a total loss is incurred,” the lawyer notes. Therefore, the lessor (as the owner of the asset) is the party entitled to receive the insurance payout. A less common practice is for the lessee to insure the item under its own name, as this requires for the policy to then be assigned to the lessor. Bronisz concludes that the lessor is the party entitled to the insurance payout from the insurer, but it should apply the payout amount towards the outstanding leasing payments. What about the payments? The lawyer notes that the situation is clear if the insurance payout is lower than or equal to the amount of outstanding leasing payments; in such case, the payout amount should be applied towards the outstanding leasing payments. If the payout is lower, the lessee should make the outstanding payments in this respect. However, if the payout is higher than the outstanding leasing payments and the parties did not make explicit provisions for such a scenario in the agreement, things become difficult as the provisions of the Civil Code do not offer clear-cut guidelines for this scenario. On the other hand, it appears reasonable for the overage (if any) on the payout beyond the amount of the remaining leasing payments to be handed over to the lessee. On the other hand, there is no definite legal basis for handing over the overage to the lessee. We should keep in mind that the lessor in fact owns the item and the lessor, as a rule, is entitled to receive the full amount of the payout. Bronisz notes that it is crucial for this issue to be expressly regulated in the leasing agreement. He also adds that similar rules should apply to scenarios where the insured party is the lessee itself, as it is common in this case to effect assignment for the benefit of the lessee and the lessee is the party entitled to the payout. “In this case, the lease agreement should also state that the overage will be handed over to the lessee; otherwise, as noted above, there are no clear-cut legal grounds to hand it over to the lessee,” the lawyer notes. “Perhaps a GAP insurance policy?” The purpose of GAP (which stands for Guaranteed Asset Protection) insurance is to cover losses incurred as a result of a loss of value of a vehicle in the event of a total loss, compared to its current market value as on the date of the loss. In practice, these policies are taken out by lessees (for their own benefit) in order to receive additional insurance payouts to cover the balance between the payout under the primary policy and the vehicle’s market value. Therefore, the policies protect the lessee against a scenario in which the payout amount is not enough to cover the outstanding lease payments and the overage, if any, is allocated towards obtaining new financing. The amounts at stake may be very high as depreciation over the course of a single year may be as high as over 10 percent of the value of the vehicle. In the first three years, cars tend to depreciate on average by half.