GAP insurance

What it means

GAP insurance is add-on vehicle cover that pays the gap between the motor own-damage payout and what the owner actually lost. It applies after a total loss or theft, when the car ceases to exist as an asset.

The problem is that own-damage cover pays only the current market value of the car at the time of the loss, while a new car loses much of its value in the first few years. If it was bought on credit or leasing, the debt can exceed the payout and the owner would have to make up the difference themselves.

There are several variants. Invoice GAP pays the difference up to the original purchase price, finance GAP up to the outstanding balance owed to the leasing company. The cover is usually taken out for several years, most often on new cars.

How it works in practice

For leased company cars we recommend considering GAP especially in the early years of the lease, when the gap between market value and debt is widest. Some leasing companies offer it in a package; sometimes a standalone policy is better value.

For a company car the premium is a deductible expense like other vehicle insurance. If it is paid in one sum for several years, it is spread in the books through prepayments over the periods it covers.

When a claim occurs, the own-damage payout often goes to the leasing company under an assignment of insurance proceeds, and GAP pays the rest. In the books the car must be disposed of correctly, the liability to the leasing company cleared and both insurance payouts recorded as income.

What to watch out for

A common mistake is assuming that own-damage cover with a new-value clause replaces GAP. They are different things, and new-value terms for cars are usually limited to a short period. Before buying GAP, compare exactly what the existing policy covers.

GAP has exclusions like any insurance. If the own-damage insurer refuses to pay, for example because of drink-driving, GAP usually will not pay either. Its terms should be read together with the own-damage policy conditions.