Guide to Guaranteed Asset Protection insurance (Gap insurance)
- In the case of a theft or write-off, a policy can pay the shortfall between your insurer's settlement figure and the value of your car when you purchased the Gap cover
- Weigh up the pros and cons of Gap cover before committing to a policy
- Policies vary significantly, so shop around for the right one
- After criticism of the market, in 2015 the FCA introduced rules to reform Gap insurance
If you sometimes feel there's something missing in your life, then Gap insurance could be for you.
One likely way of feeling that sense of loss is to make a claim to your insurer if your car is written off following an accident, or if the vehicle is stolen and never found.
The disappearance of your car may be bad enough, but there may be an even more painful void when your insurer tells you they will only pay out the current market value.
Due to depreciation, that figure is likely to be far less than you paid for your car, less than it will cost you to buy your chosen replacement, and possibly much less than you have remaining on any personal loan or contract hire deal.
Car Gap insurance covers you by paying the shortfall between your insurer's settlement figure and the value of your car when you purchased the Gap cover.
Is Gap insurance worth it?
Imagine you paid £10,000 for your car and three years later it's worth just over half that figure, perhaps £6,000.
Should your car be stolen or damaged beyond repair, then your insurer will only pay out that market valuation of £6,000 - leaving you to find the rest when it comes to buying a more costly replacement.
If you had taken out a Gap policy when you purchased the car, then it would pay out the shortfall between the market value and the original value, in this case £4,000.
That would arm you with £10,000 in total with which to find a replacement car, or pay off what might be remaining on any loan or finance deal.
Where can I buy Gap insurance?
Often, Gap insurance policies are offered by a car dealership when a buyer comes in to collect a new vehicle.
But these can sometimes be far more expensive than those purchased elsewhere, especially if the sales staff are earning a commission.
GoCompare does - as ever - encourage you to shop around and read the terms and conditions before deciding on the insurance policy to suit your needs.
You can read more about insider tricks from the used car showroom on Covered mag.
Types of Gap policies
The general principle of Gap insurance is to ensure the car owner is not left out of pocket after the write-off, or total loss, but there are a few variations in the types of policies on offer.
In the unfortunate event of suffering a write-off, then contact both your main car insurer and your Gap provider as soon as possible
The most basic form is known as return to value cover (RTV) which could be for cars bought privately or from a dealer, but not within the past three months.
It will pay out the difference between the insurance valuation at write-off and the value of the car when the Gap policy is begun.
Secondly, there is return to invoice cover (RTI) which is aimed at cars bought from a dealer within the last three months.
In the event of a write-off, the payout here will be the difference between the valuation and the original purchase invoice price.
Thirdly, there is vehicle replacement insurance (VRI), which is only available for new cars.
Here, the payout covers the difference between the valuation and the cost of buying a brand new car, even if that price has risen.
Finally, there is finance Gap insurance which pays the difference between the vehicle's market value at loss and whatever amount is still outstanding on your finance agreement.
The details of policies can vary. Some will only cover new cars, while other insurers are willing to cover vehicles up to seven or even 10 years old.
Also, some Gap providers will pay an amount towards the excess on your main car insurance policy, whilst the length of the policy can generally be set between one and five years.
Do I need Gap insurance?
Ultimately, the worth of Gap insurance depends on how likely you are to suffer a write-off. Vehicle information firm HPI has claimed that nearly half a million vehicles are written off each year in the UK.†
But before taking out a Gap policy it's worth considering a few factors that may influence your decision.
The price of the premium - on top of your regular insurance cover and any possible monthly loan or leasing fees - is something to weigh up.
This will certainly be the case if you're happy to replace your three-year-old write-off with a car of roughly similar age and condition.
But if depreciation is a concern, or if there is a finance deal left to settle, or if you simply want to make sure you go back to driving a new car, then Gap insurance could be the answer.
Check to see exactly what's covered, what are the exclusions, and how any market value at the outset of the policy is calculated.
Know whether or not the policy can be transferred if you sell your car and buy another, and whether or not you're able to cancel the policy.
In the unfortunate event of suffering a write-off, then contact both your main car insurer and your Gap provider as soon as possible.
Your Gap insurer will then normally ask your permission to contact your main car insurer in order to reach an agreement on what your car was worth when it was declared a total loss.
FCA reform of the Gap insurance market
As part of its reform of general insurance add-ons, in September 2015 the Financial Conduct Authority (FCA) implemented its changes to regulations for the £160m Gap insurance market.
Because Gap insurance is usually sold alongside a car, the FCA had found that "consumers were often buying without having previously thought about the product or shopping around for alternatives and were not always getting the best deal".
FCA view of Gap insurance before 2015
- People were buying products that offered poor value for money
- From 2008-12, just £10 was paid out on Gap insurance for every £100 paid in premiums
- FCA 2015 reforms of Gap insurance†
The FCA says that, if a salesperson starts the process of selling the product, they shouldn't complete it for a set time period, allowing customers the breathing space to think about their choice and shop around.
It also says that salespeople must provide customers with information advising them that they can shop around and that Gap insurance is available elsewhere.
In the period 2008 to 2012, the FCA says that just £10 was paid out on Gap insurance for every £100 paid in premiums, a claims ratio of 10% that indicates 'people were buying products that offered poor value for money'.
"Firms must put consumers' interests first," said Christopher Woolard of the FCA. "It's important that people are able to make informed decisions about whether they need Gap and, if they do, the best place to buy it."
GoCompare's Matt Oliver welcomed the reforms, saying: "These proposals are great news for consumers.
"They mean that customers should be better informed about Gap products - not only that they can shop around for Gap insurance, but also whether they really need it in the first place.
"They further support the customer having the right information to make an educated decision - which can only be a good thing for consumers and the insurance industry."
By Graham Thomas