If you’ve ever bought a car from a car dealership, you will almost certainly know how hard the salespeople will try to sell you GAP insurance. Given how fervent they usually are about getting you to shell out for it, you’d think it was the most amazing product in the history of mankind.
But how well do you actually understand what GAP insurance is and when you are actually able to get any benefit from it? Do you know what GAP stands for? Do you know what type of GAP insurance you have (there are many different variations) and exactly what you are covered for? And should you be taking it just because the dealer is trying unbelievably hard to add it onto your order?
What is GAP insurance?
GAP stands for Guaranteed Asset Protection. GAP insurance is an additional insurance product for your vehicle, aimed at providing extra cover – over and above your car insurance – in the event of your car being declared a Total Loss (which means it has been either written off after an accident or stolen and not recovered).
It is not a replacement for your car insurance. In fact, you must have a valid comprehensive car insurance in place to be able to make a claim on your GAP insurance.
Your regular (comprehensive) car insurance will generally cover you for the market value of your car if it is stolen or written off. However, this may be a lot less than what you originally paid for the car, as it will start depreciating as soon as you drive away from the showroom. This is normal; your car insurance is designed to cover you for what your car is worth today, not what you paid for it originally.
If you bought a brand new car, it is quite possible that it could have lost half its value in little more than two years. This is normal, as much as you may not like it, and there are valid reasons for that.
So you bought a car in 2015 for £30,000, and now in 2017 someone has crashed into you and the damage is so great that your insurance company has declared your car a write-off. They may give you a cheque for as little as £15,000. In theory, this should be enough for you to go out and buy a similar two-year-old car to yours.
Types of GAP insurance
There are different types of GAP insurance, but they are designed to cover you for one of two things:
- The difference (or the ‘gap’) between what your car insurance has paid you and what you originally paid for the car* (the Invoice Price**)
- The difference between what your car insurance has paid you and what you owe the finance company to settle your finance agreement*
* Subject to a limit, so it may not cover the full amount you think it should
** Invoice Price is the price of the car, not including registration, road tax or any other extras like warranties or GAP insurance
Using the same example as before, your car is written off and your car insurer has given you £15,000. Depending on the type of GAP insurance you have, it would cover you for either an additional £15,000 (to bring you back to the invoice price) or the balance of your finance settlement if that was greater than the invoice price (which it often is, especially early in the agreement). Your exact payment will depend on the specific type of GAP insurance you have.
The most common types of GAP insurance are:
Return to Invoice: This is what is covered in the first example above: you are paid the difference between the market value paid by your comprehensive car insurance and the invoice price of the car.
It is important to note that there may be certain exclusions that you will not be paid for, such as your insurance excess, road tax and other on-road costs, or any extras you have added to the car after you bought it. Check the fine print of your car insurance and GAP insurance policies, and ask questions when you are being given a quote or explanation by a salesman.
Finance GAP: This is what is covered in the second example above: you are paid the difference between the market value as paid by your car insurance and the settlement figure to clear your finance (which is called the negative equity). Once you add the interest and fees payable to the finance company, your finance settlement may be more than what the car cost – especially if you had little or no deposit.
Once again, there may be exclusions that you will not be covered for, or limitations on the policy. Check your documentation and ask questions before signing up.
The are specific GAP policies for leased vehicles, which effectively do the same thing as Finance GAP, in that your lease payments and fees are all cleared.
When does GAP insurance cover me?
Only in the event of a Total Loss, which means your car has been stolen and not recovered, or written off in an accident. Your insurance company pays you according to your policy (usually the market value of the vehicle according to a particular guide), and then your GAP insurance pays you over and above that amount.
When does GAP not cover me?
If your car is not a Total Loss, your GAP does not pay out. If your insurer decides to repair your car rather than write it off, it is not a Total Loss.
If, for any reason, your car insurance refuses to pay out on a claim, your GAP insurance will also not pay out. This usually means you have voided your car insurance policy somehow – for example; you were drunk, your car was not taxed, you didn’t have a valid MOT, or any other reason. If your car insurance does not pay out, neither does your GAP insurance.