What is GAP insurance and why might it be relevant to a car finance claim?

Guaranteed Asset Protection (GAP) insurance pays the difference between what your motor insurer pays out if your car is written off or stolen and a higher figure, such as the price you originally paid for the vehicle or the outstanding finance balance you still owe. It exists because your comprehensive car insurance policy would only pay you your vehicle's current market value at the time of the loss, which is often considerably less than either of those amounts.

Cars depreciate fastest in the early years of ownership, and a car you buy new can be worth substantially less than its purchase price within twelve months. If you bought that car on finance, your outstanding balance may have reduced far more slowly over the same period, particularly if your agreement was structured around a large final payment. That shortfall between the figures is the ‘gap’ the product is named after.

Millions of motorists were sold GAP insurance alongside car finance between 2007 and 2024. While their GAP insurance policy was simply another line on the paperwork for many motorists, it has since become a product of real interest to the Financial Conduct Authority (FCA) through its general insurance value measures work, and to consumers and their representatives who are now asking whether they paid a fair price for it.

How does GAP insurance work?

GAP insurance pays out only after your motor insurer has settled a total loss (write-off) claim after an accident or if your car is stolen and not recovered. It generally does not pay out in any other circumstances. GAP insurance does not replace your motor insurance, is not compulsory, and no lender or dealer can require you to buy it as a condition of a finance agreement or a vehicle purchase.

Here is a practical example of how it works:

• You buy a car for £24,000 using a cash deposit and a finance agreement.
• Two years later, you have an accident, and the car is written off.
• You claim on your comprehensive car insurance policy. Your motor insurer assesses the vehicle's current market value as £14,000 and pays that figure, less any applicable excess.
• Your outstanding finance balance is £17,000, so you still owe £3,000 on a vehicle you no longer have.

In this scenario:

• A GAP insurance policy protecting the finance balance would cover that £3,000 shortfall.
• A GAP insurance policy protecting the original price would instead cover the £10,000 difference between the motor insurance payout and the £24,000 you paid.

Those are very different outcomes, and the policy you hold may not match what was described to you in the showroom or over the telephone.

Most GAP insurance policies require you to hold comprehensive car insurance for the cover to be valid. That is why dealers ask you how you intend to insure the vehicle when they are trying to sell you finance. Most also pay against the insurer's assessed settlement figure. That means that if you accept a low valuation from your motor insurer, you will reduce what you can recover overall.

What does GAP insurance not cover?

GAP insurance does not usually cover:

• repairable damage, however expensive;
• mechanical or electrical breakdown (any cover for these will fall under your warranty);
• cosmetic damage, alloy wheel damage or tyre damage (your car dealer may have also sold you these as separate add-on policies);
• missed or arrears payments on your finance agreement; or
• a total loss where you did not have comprehensive motor insurance.

GAP insurance policies also carry limits and exclusions. While these can vary considerably between providers, common conditions include: 

• a maximum claim amount;
• a maximum vehicle value or age on the date the policy is taken out; 
• a requirement that the vehicle was purchased from a VAT-registered dealer; and
• exclusions for vehicles used for hire and reward or for business purposes. 

Some policies also exclude negative equity carried over from a previous finance agreement, meaning that if you were to have your new car written off you would still be liable for what you owed on your previous vehicle. Some policies will also cover your motor insurance excess up to a stated amount, which can be a useful benefit, albeit a modest one relative to the GAP insurance premium itself.

The main types of GAP insurance policy

GAP insurance is a label that describes several distinct products; the difference between them is the figure your policy pays against.

Return to invoice

Return to invoice policies pay the difference between your motor insurer’s settlement and the price shown on the original invoice for the vehicle. That means if you paid £24,000 for your car and the insurer pays you £14,000, your GAP insurance policy meets the £10,000 difference. It protects the amount you spent, which for many buyers is the figure that matters. It does not, however, guarantee that you can replace the vehicle, because an equivalent car may cost more than you originally paid.

Vehicle replacement cover

Vehicle replacement cover pays the difference between the settlement and the cost of buying the same vehicle, new, at today's prices. If prices have risen since you bought the car, vehicle replacement cover may pay more than a return to invoice policy.

It is generally the most expensive form of cover and usually restricted to vehicles bought new, or nearly new, from a franchised dealer. Some variants cap the replacement figure or apply an inflation limit, so the ‘new for old’ description often carries qualifications.

Finance GAP, contract hire GAP and lease GAP

A finance GAP policy pays the difference between the insurer’s settlement and the outstanding finance balance owed to your car finance company. It clears your debt; it does not reimburse what you spent.

Contract hire GAP, sometimes described as lease GAP, is the equivalent product for a contract hire or leasing agreement.

These policies are narrower than they first appear. If your outstanding balance is lower than the insurer's settlement, the policy pays nothing because there is no gap to close. You are most likely to find yourself in this position if you paid a significant deposit on your vehicle.

Return to value

A return to value policy pays the difference between the settlement and the vehicle’s market value at the date you bought it. It is aimed at used car buyers who paid below the retail valuation and protects the car’s worth, not the invoice price.

How much does GAP insurance cost?

GAP insurance premiums depend on: 

• the type of cover;
• the value and age of the vehicle;
• the length of the policy; and 
• where you buy it.

The final bullet point is significant in the context of potential mis-selling, as tax and commission made dealership policies more expensive than equivalent cover bought independently, with a substantial combined effect. 

Tax

Insurance Premium Tax (IPT) is charged at a higher rate of 20% when insurance is sold alongside the goods it relates to, which captures GAP insurance sold by the dealer supplying the vehicle. In contrast, cover arranged independently, unconnected with the vehicle purchase, attracts the standard IPT rate of 12%.

Commission

In September 2023, the FCA reported that it had seen examples of some firms paying out as much as 70% of the value of GAP insurance premiums in commission to parties in the distribution chain, including motor dealerships, and that only 6% of the amount customers paid in premiums was being returned to them in claims.

The regulator acted on that finding, and in February 2024, firms representing around 80% of the market agreed to pause GAP insurance sales, and those permitted to resume selling in May 2024 did so, in the FCA’s words, ‘with materially lower levels of commission being paid out to those selling GAP, improving value for customers’.

Car Dealer Magazine, citing a 2019 Which? study, reported that GAP insurance policies bought from a dealer were between 102% and 278% more expensive than equivalent cover bought directly from an insurer. Those figures pre-date the FCA's intervention in this market, and pricing has moved since.

Term length is a further consideration. Policies sold by dealerships have commonly been capped at 36 months, while cover arranged independently can often run for up to five years. A three-year policy on a four-year finance agreement leaves the final year, often when the shortfall is largest, unprotected.

Can you cancel a GAP policy or claim a refund?

In most circumstances you can, although what you get back depends on when you cancel and on the terms of the policy itself.

Most general insurance contracts carry a statutory cooling-off period of at least 14 days, running from the date the contract was concluded or the date you received the policy documents, whichever is later. Cancelling within that window normally entitles you to a full refund, as long as you have not made a claim.

After the cooling-off period, many GAP policies can still be cancelled, often with a pro-rata refund of the unused portion of the premium, less an administration fee, again contingent on not having made a claim. Cancellation policies differ between providers, so check your policy schedule and terms to know where you stand.

People are also sometimes caught out by the following scenarios. 

Selling or returning the vehicle before the GAP insurance policy ends

The cover relates to a specific car, so it does not simply follow you to the next one. However, some providers allow you to transfer a policy. 

Settling the finance early

If your GAP policy protects the outstanding finance balance and that balance no longer exists, the cover may have little left to do, and it is worth asking whether a refund is due for the remaining term.

A refund of unused premium is a different matter from a complaint about how the policy was sold or priced, although they are not mutually exclusive.

Do you need GAP insurance?

It depends on the size of the shortfall you would face. GAP insurance may be valuable to some drivers and close to worthless to others, as detailed in the table below.

The shortfall is a real risk, and for some drivers, GAP insurance is a sensible financial safety net. Criticism of this market broadly concerns how the product was historically priced and sold, not whether the risk it addresses exists.

GAP insurance on personal contract purchase and hire purchase agreements

How your finance is structured directly affects the size of any shortfall.

Under a personal contract purchase agreement, your monthly payments cover the depreciation on the vehicle rather than its full price, with a large final payment, sometimes called a balloon payment or guaranteed future value, deferred to the end of the term. Because you are not paying down the capital as you would under a conventional loan, the outstanding balance can remain high relative to the car's falling market value for much of the agreement. This is where shortfalls can arise.

Hire purchase works differently. Payments are spread more evenly across the term, and the balance reduces more steadily. That means the gap tends to be narrower, though it can still be significant in the first couple of years if you paid a low deposit.

Contract hire is different again. You never own the vehicle and never have the option to do so, so what is at stake is not equity but the early termination sum owed to the funder, the issue that contract hire GAP policies are designed to address.

Negative equity can complicate all of these. Where a shortfall on an earlier agreement was rolled into a new one, the balance on the new agreement starts higher than the vehicle is worth, and it can stay that way for years. Not every GAP policy covers carried-over negative equity. This is worth checking on your policy schedule, as while rolling over negative equity may seem like a sensible decision in the context of your monthly finance repayment, you could still leave yourself with a potentially substantial liability if your vehicle is written off for any reason.

The rules your car dealer had to follow

GAP insurance sold as an add-on has been subject to specific FCA rules since 1 September 2015, introduced after the regulator found that consumers buying at the point of sale were not shopping around and were paying more as a result.

Two requirements matter most:

1. The first is the prescribed information. Under the rules set out in ICOBS 6A, a firm selling GAP insurance alongside a vehicle must give the customer prescribed information. This includes the total premium shown separately from any other price, the significant features and benefits, any significant or unusual exclusions and limitations, whether the policy is being sold in connection with vehicle finance, and the fact that GAP insurance is available from other providers.
2. The second is the deferral, often described as the deferred opt-in. A dealer cannot conclude the sale of a GAP policy until at least two clear days have passed since it provided that information. The intention was that GAP insurance could no longer be introduced and sold in the same conversation, so buyers would have the opportunity to compare prices elsewhere before committing. A customer can bring the purchase forward, but only by initiating it themselves and confirming that they understand the normal deferral period.

If you bought GAP insurance from a dealership after September 2015 and the policy was sold to you on the same day as the car, with no separate information provided and no pause in which to shop around, that is a departure from the rules that were supposed to protect you.

How to check what you were sold

Many people are unsure whether they bought GAP insurance at all, particularly where the cost was absorbed into a monthly payment. Your finance agreement should itemise anything financed alongside the vehicle, and your policy schedule will name the insurer and the type of cover. The invoice date for the car and the date the GAP policy was confirmed will tell you whether the deferral was observed.

If you no longer hold the paperwork, your lender and the GAP provider should both be able to supply copies on request.

When GAP insurance may become part of a car finance claim

Concerns about GAP insurance sit alongside, but separately from, the wider issues around motor finance commission. The FCA’s motor finance consumer redress scheme deals with commission arrangements on the finance agreement itself, such as discretionary commission arrangements. It does not cover GAP insurance or other add-on products. Complaints about add-ons must be pursued separately and will not be picked up automatically by a lender reviewing your motor finance agreement and assessing its eligibility for redress under the FCA scheme rules.

That matters because the issues can overlap. For example, where an add-on premium was inflated by undisclosed commission and then rolled into the finance agreement, you may have paid an excessive price and then paid interest on it for the life of the loan. We have previously examined the evidence on GAP commissions, how GAP insurance and other add-on products may have been mis-sold, and what the FCA’s own data shows about the value of these products.

A solicitor investigating a car finance claim can request disclosure of the commission paid on every product financed at the same time as the vehicle, not only the agreement itself. The prescribed information a dealer had to give you covered the premium, but not the commission built into it, so disclosure is often the only way to establish what that commission actually was.

Register your motor finance claim with Harcus Parker

You do not need to use professional representation to complain to your lender, and you can do so at no cost. 

If you choose to instruct Harcus Parker, we can help you:

• identify your motor finance agreements dating back to 6 April 2007;
• establish which add-on products were sold to you, and at what cost;
• request disclosure of the commissions paid on those products; and
• pursue claims in respect of those products, if applicable, on your behalf.

Instructing a solicitor does not guarantee you will receive additional compensation or even have a valid motor finance or GAP insurance claim. However, it does mean the whole of the transaction can be examined, not just your motor finance agreement.

Check your eligibility and register your car finance mis-selling claim here.