Odurinde Finance & Business Blog

Gap insurance simply stands for Guaranteed Asset Protection insurance. Gap insurance is a type of protection for motor vehicles which is designed to come into effect in the event of an insurance claim for your vehicle. Gap insurance fills in the “gap” between what your car would have cost if it was brand new and what it costs now. This therefore ensures you get a full payment towards a brand new car should your old car be deemed a total loss.

In normal insurance situations with a standard comprehensive policy, when a vehicle is deemed a total loss following an accident your claim will cover the cost of your car as it stands today prior to the incident. The insurance company will evaluate the worth of the car and then make a settlement for your claim based on this estimation minus your policy excess.  Usually a policy holder will choose the cheapest premiums for their policy which in turn means that in the event of an accident, the costs they have to cover themselves (the excess) is quite high. This can mean the final sum paid to an individual is poor at best and not nearly enough to cover the costs of purchasing a new car.

Gap insurance can help you to reclaim some of your money back by calculating an additional sum on top of your usual insurance that covers the cost of the depreciation in value your vehicle has suffered. Motor insurance usually only covers what you will need to put yourself in the same position as you were before. This means even though you may have paid thousands for your car originally, they will only pay out what it was worth at the time of the incident which can be significantly less. Since your car has depreciated in value over the years the original sum you paid out for your car is not covered by your insurance as the car is no longer worth that amount.

Gap insurance is a separate insurance scheme with its own premiums that is to be used in conjunction with your usual motor insurance. Your gap insurance is not designed to be a motor vehicle insurance policy. Gap insurance only insures for the depreciation in value of your vehicle. This means you can only claim on your gap insurance if:

1. Your vehicle is deemed a total loss (i.e. is uneconomical to repair according to your vehicle policy).
2. You do not qualify under your existing motor insurance policy for a brand new replacement vehicle but are offered a cash settlement instead.
3. Your vehicle has depreciated in value from the time of purchase to the time of the incident where it is deemed a total loss.
4. Your gap insurance will take into account both the settlement you were given and the excess you are accountable for.

For example, you purchase a car for 15,000 and 5 years later your car is stolen or damaged beyond reasonable repair. As the car is not brand new (1-2 years) you do not qualify for a replacement vehicle. The current worth of your vehicle is estimated at 900 by a qualified engineer and of this amount you were paid 750 from your motor insurers because you had an excess of 250 on your policy. You then make a claim on your gap insurance once your motor claim has been settled for depreciation loss. Your gap insurance will take the original payment sum (15,000) and deduct the total settlement sum including excess (900). The gap insurance will then make a separate payment to yourself of 14,100 to cover the depreciation in value of your vehicle.