Gap Insurance is an optional extra insurance policy which may be purchased on top of the standard fully comprehensive motor insurance. It is required in the motor industry to cover the negative equity a motorist is liable to pay in the case of their car being written off when their standard insurance payout is significantly less than their outgoing expenditure.
The motor insurance industry is the only type of asset insurance with a need for Gap insurance, all other asset protection for example house insurance, mobile phone insurance or even travel insurance is set out on a like for like, new for old ‘betterment’ basis.
This means that if an asset went wrong or for example a holiday was cancelled, the claimant would receive all of their money back or a brand new product of a similar specification, it could be argued that they potentially benefit from claiming. However in the motor insurance industry, there is a substantial shortfall between how much a motorist pays out on the original costs of a vehicle and the payout they may receive if that vehicle is written off.
The necessity of gap insurance is particularly significant when buying a car through hire purchase or a lease agreement as in the case of the car for example being stolen and written off, the motorist is still legally bound to pay the remainder monthly repayments and potentially the balloon payment at the end of the contract to buy the car they no longer have. The pay out of a comprehensive insurance claim is normally not enough to cover these costs however if the claimant owned gap insurance that policy would cover the shortfall.
There are three major types of gap insurance:
- Return to Invoice Gap Insurance
- Vehicle Replacement Gap Insurance and
- Finance Gap Insurance