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GAP Insurance Guide

Gap insurance, also known as Guaranteed Asset Protection, has the aim of providing some peace of mind and financial protection if something happens to your vehicle. Cars and other vehicles generally lose value over time as you drive them and add more miles. If your vehicle is stolen or you suffer an accident, a common scenario is that the insurance company declares the vehicle beyond repairs and writes it off. However, they will only ever pay the market value of the vehicle at the time of the loss. This might not be enough to give you back what you paid for the car, or to settle the outstanding finance on your vehicle. Gap insurance is there to make up the difference.

Requirements for GAP Insurance

Every Gap insurance policy will have terms and conditions which you must agree to. These vary but usually include:

• Having the vehicle comprehensively insured with a UK insurer
• The insurer must have declared the vehicle a write-off or uneconomic repair
• The insurer must not agree to repair or replace the vehicle
• The policy must only cover the market value of the vehicle

When Can I Buy GAP Insurance?

Usually, you have a limited time period after buying the vehicle to arrange GAP insurance and this can vary from 30 to 180 days. Most GAP insurance policies will run for anything between two and five years. The policy will start from the day you bought the vehicle rather than the day you took the policy, so it’s always best to arrange this as soon as possible. If you wait the six months maximum to take out a three year policy, in effect you are only getting two and a half years of cover, not three.

Types of Gap Insurance

There are many different Gap insurance products on the market, and the policy you choose will depend on your circumstances. It is always wise to look around at your options before buying any insurance policy, and Gap insurance is no different in this respect. The main types of Gap Insurance are:

• Finance GAP Insurance – this covers vehicles purchased on a hire purchase or personal contract plan (PCP) agreement. It will not cover vehicles purchased using a bank loan, or from a private seller. This insurance is also known as shortfall insurance and will cover the difference between the market value of the written-off vehicle, and the outstanding finance which you owe, ensuring you are in the same financial position as without the loss.
• Return to Invoice insurance – similar to the above, this covers purchases from motor dealers. The insurance will cover the difference between the write-off value, and whatever the original invoice price was for your vehicle.
• Vehicle Replacement Insurance – this can be used for vehicles purchased outright as well as being financed. This is the most comprehensive Gap insurance and will bridge the difference between the settlement and the cost of buying the same vehicle again, whether that is a new car, or one which is a few years old. This is particularly important at present, as the price of used cars has ben rising sharply since the Covid-19 pandemic.

Contract Hire, Leasing and Gap Insurance

Leasing or hiring a vehicle is an increasingly popular choice, but requires a different type of insurance as this form of finance means you will never own the vehicle. The insurance will cover any shortfall which you might owe the leasing or finance company after the insurer has paid out, if the vehicle is badly damaged or stolen.

Many policies also offer the option of deposit protection insurance, which covers the initial down payment which you make on a new lease agreement. Claiming this back in the event of a total loss gives you enough cash to put down a deposit on your next lease without delay and will mean you don’t have to be without a car while you save up for another deposit.

Features of Gap Insurance Cover

Each policy will have different features and benefits, but there are some common aspects to most cover. Before signing up for a policy, take some time to look at all of the offers on the market and carefully compare the features and benefits which the policies offer. The most common features you can expect to find on a Gap insurance policy are:

• Excess Contribution – all insurance policies will have an initial excess you are expected to pay, and most Gap Insurance will cover between £250 and £750.
• Limit on Claims – policies might set an upper limit to the claim you will be able to make, so think carefully about the level of cover you need. Alternatively, choose an unlimited product.
• Combined cover – many policies will roll together two or more of the types of Gap insurance into one product. This may mean you are covered for either the original price you paid, or the cost of settling finance.
• Cover for Accessories – Additional extras which you have added onto your car will be covered by the GAP insurance, but not all policies will cover items like paint or fabric.
• Transfer – Usually, you should be able to transfer your Gap insurance if you buy another vehicle during the duration of the policy.
• Cancellation – if you sell the vehicle before the end of the Gap insurance policy, you should be able to cancel and claim a partial refund.

Main Exclusions to Gap Insurance

• Lack of Insurance – if you’ve only taken third party cover, you allow your insurance to lapse, or your insurer refuses to pay out, you will not be covered. This is particularly an issue if you have insured your car “fully comp” and you allow a friend to drive on their third-party insurance. If they have a crash, Gap insurance won’t pay out.
• Commercial use – most policies won’t cover any vehicle which is being used as a taxi, courier vehicle or for a driving school.
• Negative Equity – there are some scenarios where you can add finance outstanding on a car which you part-exchange onto a new agreement. This would not be covered under a Gap insurance policy.

Old for New Replacement Cover

Not all car insurance policies give “new for old” cover, and often only cover new cars for one or two years. That should mean that if your car is written off, the insurance company will get an identical one for you, right? Well, not always. There will usually be lots of terms and conditions stating the circumstances in which new for old will and will not pay out. Insurers often will not pay out if they cannot source a replacement vehicle in a given time, or you are not the registered keeper because you are leasing.

This could mean that you are only awarded the market value of the car at the time of the write-off, which might not be enough to get a replacement.

GAP Insurance for New Cars

A lot of the reasons why Gap Insurance is a good idea for new vehicles equally apply to used cars. All cars lose value, although used cars tend to lose value less quickly than brand new. The cost of repairing used cars is rising, partly due to the fact that used cars have increasing levels of gadgets and extras such as sensors or cameras, and partly because of a shortage of mechanics leading to rising costs for labour. This all means that the level of damage which results in a car being written-off is less than ever, as repairs cost so much to complete.

Buying Gap Insurance

Many motor dealers will have their own GAP insurance policies and these will be offered to you as an add-on when taking finance or negotiating the price of the purchase through the dealer. Buying insurance through the dealer can be an expensive decision though. Research has shown that the typical price for Gap insurance sold by a dealer is around £300 to £400, but if you purchase it independently, the cost can be half that amount. Always shop around to make sure you are getting the best value for money in terms of not just cost, but also in the features offered.

Dealers are more expensive partly because they are only selling a small number of policies, and often offer through intermediaries who take a cut too. They will also usually offer commission to salespeople for selling insurance. Higher rates of tax may also apply to insurance policies sold through a dealer. Dealers may also only be able to offer their specific Gap insurance policy, whether or not this is the most appropriate policy for your needs.

There have also been accusations in the past that car dealers can be very pushy when offering Gap insurance, leaving customers feeling pressured into taking it. Legislation came into effect in 2015 from the Financial Conduct Authority which is supposed to put an end to these tactics, and this bans dealers from pushing you to take insurance at the same time as buying the car. They must now give you the information and allow you two days to look elsewhere for similar products.

Motor Insurers

You might think that the obvious place to look for Gap Insurance is with the same company which provides your standard motor insurance policy. Very few insurers do offer gap insurance though, although some are starting to dip their toes into the market. Most of the large online comparison sites will let you compare costs for Gap insurance in the same way as comparing the costs for other insurance products.

Brokers

Often, brokers are the best place to get advice on Gap insurance. Specialist firms have been in the market for years, and can give expert advice. Prices are often lower through a broker, and they will be able to offer a wide range of products through a panel of different insurers. A broker which does nothing but sell Gap insurance will have come across your particular situation before, and will be able to give specific advice and recommendations better than an insurer which offers a much wider range of products.

Finance Companies

Many dealers do not have their own insurance company offering cover but deal with an approved finance house which sells products on their behalf. They may offer you a call from an expert to talk through your options. The main issue with this approach is the range of options, as obviously any finance company will only be able to offer their own products.

Choosing A Policy

Although price is often the starting point for any purchase of Gap insurance, it shouldn’t be the only factor which you consider. The general rule is that very cheap policies do not offer the level of cover of the more expensive ones, but it is essential to always look at what you are being offered and compare products from different companies before making a final choice. This applies whichever route you are using to purchase a gap insurance policy. Never make a decision on the spur of the moment, or feel pressured into taking a policy you are not sure about from a pushy salesman in a car showroom.

What Happens if Things Go Wrong?

Most Gap insurance policies are sold through a retailer, whether that is your car dealer or insurance broker. The company which underwrites the risk of the insurance is usually a different company altogether. If the retailer closes or goes out of business then your insurance policy will remain in place. If you need to make a claim, then you will deal directly with the insurance company and the retailer or dealer will have little to do with the process. If the insurance company themselves goes bust or out of business then the Financial Services Compensation Scheme will pay up to 90% of the claim if you need to submit one.