GAP insurance is a type of insurance product you can take out for your car to cover the difference between what your insurer pays out, and the original price of the car. Let’s find out more about it…
GAP Insurance… the Clue is in the Name
If your car is stolen or gets written off, there is usually a gap between the amount your insurer will pay out, and the price you originally paid for the vehicle. This is because standard car insurance typically only covers you for your vehicle’s current market value.
Guaranteed Asset Protection (GAP) insurance is a type of insurance intended to cover this difference.
GAP insurance won’t directly replace your car or its value in full. Rather, it helps bridge the gap, meaning that after your car insurer’s settlement is paid, you’re not left short of what you need to pay off your finance debt or purchase a replacement of the same make and model.
Loans and Leases
Many people who take out GAP insurance have a loaned or leased car, because if your car gets written off or stolen when it’s on finance, you risk owing more than the potential pay out from a total loss claim.
If you own your car, you don’t owe anyone any money for it, so you should be able to use the payout from your insurer to buy a replacement car of a similar age and condition.
Different Types of GAP Insurance
There are three main types of GAP insurance, with different degrees of cover:
- Back to invoice – this pays the difference between what your car insurer will pay out if your car is stolen or written off and the original amount you paid for the vehicle OR the amount you owe to a finance compan
- Vehicle replacement – this pays the difference between what you get from your insurer and what you would pay if you bought the same car today brand new, or if it was a used car, how much it was at the time you purchased i
- Contract hire – this is only available to those leasing their car with no option to buy. Your insurer covers your vehicle’s current market value and this type of GAP cover pays for any remaining payments owed on the lease
Exclusions
In order to take out GAP insurance you must have fully comprehensive car insurance, and will only receive a pay out if your car is stolen or written off. It also typically doesn’t cover things like:
- Wear and tear, such scratches to the paintwork
- Any claims resulting from you breaking the law, such as driving under the influence
- Depreciation due to age or mileage
- Any non-standard modifications added after buying the car, such as alloys, spoilers, or tinted windows
- Damage due to negligence, such as leaving the car unlocked or not regularly maintaining it
- Cars over a certain age or mileage
FCA Intervention
The FCA has shown concern for several years about GAP insurance products not providing fair value to customers.
In 2022, according to their value measures data, there were over 2.4 million GAP policies in force, but only 6% of the amount customers paid in premiums for GAP insurance was paid out in the claims. Some firms paid out as much as 70% of the value of insurance premiums in commission to parties involved in selling GAP insurance.
As a result, they requested GAP insurance providers to take immediate action to ensure customers were getting a fair deal. This has led to multiple insurance firms agreeing to pause sales of GAP insurance in February and March this year.
Firms that have now resumed their sales of GAP insurance have done so with lower commission levels being paid to those selling GAP, meaning better value for customers. Some insurers have stopped selling GAP insurance through dealerships, as this can lead to customers paying much more than is necessary due to commission.
Before taking out any insurance product, you should do plenty of research and consider the benefits and drawbacks of taking it out. Ask yourself questions like:
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Is this product right for me?
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What will this product cost me?
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What could this product save me?
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Could I get this product from an alternative provider?
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Is there an alternative option?