How does gap insurance work?

If you have bought a new car, a gap insurance policy can cover the loss in value if your vehicle is written off. Here is how gap insurance works.

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How does it work?

Gap is a shortened version of Guaranteed Asset Protection and can cover the difference between the amount you paid for your car, and the amount your car insurance policy pays out.

For example, if you crash and write off your new car a year after buying it, your insurer will only pay out its current value. This is likely to be much less than the amount you paid.

Gap insurance can also cover any money you still owe if you bought your car on finance and your car insurance pay out is not enough to repay it. Most policies last for up to 4 or 5 years, or until you make a claim.

You may be offered gap insurance by the dealership when you purchase a new car.

What is a total loss?

A total loss is when you crash or damage your car, and your car insurer decides that the cost of repair is greater that the value of your vehicle. This is also known as a write off.

Your car could be considered a total loss if it is stolen and never recovered.

If your insurer decides your car is a total loss, they will dispose of it and pay you the current market value of your vehicle.

What type of policy can you get?

There are four main types of gap insurance you can choose from:

  • Vehicle replacement gap insurance: This covers the difference between the lump sum you get from your car insurer, and the amount your car would cost to buy new. This means you may get more than you paid to allow for the rising cost of cars.

  • Return to invoice gap insurance: This covers the shortfall between what your car insurance policy pays out, and the exact amount you paid for your car, and can be used for both new and second-hand vehicles.

  • Return to value: This covers the difference between the insurance payout and the market value of your car when you bought it. This could pay out more than return to invoice cover if you got a discount when you bought your car.

  • Finance gap insurance: This covers any money you owe a finance company if the insurance payout does not repay your debt. This means you will have no car or cash after you claim, but what you owe will be paid off.

Which option you choose depends on how you bought your car, and whether you would want to buy a brand new car if yours is written off.

Gap insurance can cover you for up to five years, and comes with a maximum claim limit of between £25,000 and £100,000, depending on the policy.

Here is how to work out which gap policy you should get

What is excluded from gap insurance?

Gap insurance may not cover you in certain situations, so it is important you understand what is excluded from the policy before you buy. Common exclusions include:

  • Any claim where your car insurer has not declared your vehicle a total loss

  • Any value added by modifications made to your car after you bought it, e.g. sound system

  • Your car insurance excess payment over a certain amount, e.g. anything over £250

  • Total loss caused by racing, rallying or any other competitive event

  • If you do not hold a comprehensive car insurance policy

Check the policy documents carefully before you buy a policy so you understand exactly when you can make a claim.

Making a gap insurance claim

To make a claim on your gap insurance policy you need to:

  • Make a claim on your car insurance and have your vehicle declared a total loss. Here is how to make a car insurance claim.

  • Contact your gap insurer before accepting any settlement offer from your car insurance company. They may take over the negotiations of your total loss claim.

  • Complete and return any claims form they send you. You may need to provide any supporting documents your insurer requests, e.g. your MOT certificate.

If your claim is rejected, or you are unhappy with the outcome of your claim, you should complain to your insurer. Here is how to complain to your insurer.

If you are still unhappy with their decision, you can refer your complaint to the Financial Ombudsman, who can look into your claim.

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