So, what is GAP insurance and do you need it? Until recently, your car dealer would sell you GAP cover without mentioning that it is available elsewhere but now they are required to let you know that this is available from insurance brokers.

Having your car stolen or entirely written off in an accident is a horrible thought, especially if it should happen to a brand new vehicle. Guaranteed Asset Protection (GAP) insurance covers the difference between the value of your car (which the insurer would usually pay out) and either the amount you paid for the car or the value of any outstanding payments.

Depreciation means that new cars lose their value very quickly. The AA reports that on average a brand new car decreases in value by 60% after three years. So for example if your car was written off after three years, your insurance company would only give you its current value (40% of what you paid for it). This probably wouldn’t be enough to afford a similar replacement car, and it is unlikely to be enough to repay the outstanding balance if the vehicle was bought on finance.

Do I need GAP insurance?

If you owe more than your car is worth, you risk being in negative equity. This is when GAP protection could be useful, for example if the down payment for your finance deal was small, if you’re paying a lot of interest or if you are paying the debt off over a longer period. Similarly, if you’ve signed up for a long-term contract hire arrangement, loss of the car might mean you end up owing the company more than your insurance provider will pay out.If you are concerned that you wouldn’t be able to afford to replace your car on a new-for-old basis, GAP protection could also be helpful.

When is it unnecessary?

Most fully comprehensive car insurance policies offer brand new car replacement during the first 12 months of ownership as long as you’re the first registered owner – although this may include restrictions such as excluding theft or accidents where the insured is at fault. Alternatively, your finance agreement may already cover you for the difference between the official value of the car and how much you paid. Be careful to read the terms and conditions to avoid paying for cover you don’t need. Be very wary if the car was pre-registered by the dealer. This is often a good way to save money on your new car but does mean that you are not legally the first owner, even if you buy it with zero mileage recorded.

If your business runs a vehicle such as a van, light commercial vehicle or pickup truck, you may want to consider a Commercial GAP policy. Return to Invoice GAP would pay the difference between your comprehensive commercial vehicle insurance settlement and the original invoice price of your vehicle, whereas Vehicle Replacement GAP will pay the difference between your lost motor and the cost of a replacement vehicle, usually matching the original at the time of purchase.

Watch out for exclusions

Remember you need to have fully comprehensive insurance in place to claim on GAP insurance. GAP insurance will not cover any amount deducted by your main car insurance company, for example reduced payouts due to unpaid premiums, salvage value or contributory negligence. Generally it will only cover excesses up to £250 of your claim, although additional covers can be purchased for higher amounts. Non-standard extras added by the owner, such as speakers or a sat-nav, won’t be covered. GAP insurance won’t pay out until your claim is successful and settled, so bear in mind that any outstanding finance payments must be managed on your own until then.

GAP insurance does need to be purchased at the same time or very close to the time when you take possession of the vehicle but it is a one-off payment for the length of the finance agreement and is relatively cheap for the peace of mind that it gives. We recently dealt with a case where the client would have been nearly £9,000 worse off due to the type of finance plan that they had signed up for.