More than a few people have been asking us about gap, or more correctly GAP insurance recently, and it’s fast becoming the ‘I don’t know what a tracker mortgage is…” of 2017. GAP, or Guaranteed Asset Protection, is an extra layer of insurance over and above standard cover. Insurance is never a straightforward process (especially in Ireland) but the basic rule of thumb where cars are concerned is that if you make a claim for a total write-off, you’re not going to get the value you originally insured the car at.
Instead, you’ll get what your insurer considers the current market value to be, and in many cases that can be both (a) considerably less than you were hoping for and (b) considerably less than you need to replace the car with something you consider equally as desirable.
Vehicle Replacement Insurance Cover
GAP insurance fills in that gap, and generally is bought to cover the cost of replacing a brand new car, where there’s a greater chance for a disparity between replacement value and assessed market value because of the precipitous pace of depreciation in the new car market. GAP usually comes in three forms — there’s Vehicle Replacement Insurance, which the extra cost between what the insurer is paying out on your total loss vehicle and the cost of buying a brand new identical one. Some policies even guarantee to cover the extra cost if the car maker raises their prices in the interim.
Return to Invoice Cover
There’s Return To Invoice cover, which is basically a simpler version of the above and which tops up the write-off payment to the original price which you paid.
Return to Value Cover
Finally there’s Return To Value, which pays out to bring your write-off payment to a previously agreed value for the vehicle in question.
GAP - bridges the assessed value to a replacement value
In its essentials, GAP cover basically takes a conventional motor insurance policy (which is designed to pay out assessed market value in the event of total loss or write-off) and turns it into something more akin to what we do when insuring valuables in our homes. Engagement rings, expensive watches, high-end electronics etc can be nominated at a specific value on the policy, and whenever they are lost, stolen or broken, that’s the price that the insurer agrees to pay out, regardless of depreciation or market fluctuations.
Sounds like a great idea, right? In spite of a car being probably the most valuable depreciating asset you own, you are able to protect its value to a more useful level in the event of a catastrophe.
Not so fast.
Step back and look at this coldly and dispassionately. All insurance is, in effect, a form of gambling. You’re paying your policy as almost a stake in the game, but instead of betting to win, you’re betting to cover yourself if you lose. Most of us accept that as part of the way the system works and that’s fine.
Adding GAP cover though seems to move us into some of the same territory as the dreaded payment protection insurance, offering us cover (at a cost, and at a time when insurance prices are spiraling wildly out of control) for something that, in reality, isn’t going to give us a great deal of benefit.
Again, look at this dispassionately. If you buy a brand new car for €20,000 today, and one year down the track it is stolen or destroyed in some accident, the depreciation on that car is going to be in the region of 20 per cent, or €4,000. GAP cover says it will pay you that €4,000 so you can go and buy a new car of the same type again, but actually what you should be buying, like for like, is a year old version of the car you bought. And given the way the car market in Ireland currently is, the likelihood is that you could probably go back and find the same car on sale, either as a dealer-demo or a ‘nearly new” for, say €18,000 leaving you with just a shortfall of €2,000. That’s €2,000 that the extra premiums for your GAP cover will have taken a big chunk of. Added to which total loss payments are comparatively rare — most cars can be repaired rather than replaced entirely — so the window for GAP’s effectiveness is shrinking all the time.
How GAP insurance may be sold
The other concern, as with PPI, is the way that GAP cover is being sold. Quite a lot of the time it’s being bundled in with loan repayments and the authorities, especially in the UK, are taking a dim view of this. The UK financial ombudsman’s office said this week that “many complaints we see about GAP insurance involve policies sold by car dealerships alongside cars bought on finance. We’ll ask questions about how the policy was sold – and decide whether someone was given clear information about how it worked. If someone was given personal advice about buying GAP insurance, we’ll check the advice was suitable. For example, if they paid a large deposit and only took out a small amount of finance, it’s unlikely there would actually be a “gap” to cover. Some GAP insurers don’t give advice – so it’s up to a potential customer to read about a policy and decide if it’s right for them. If the insurer didn’t give clear information – or suitable advice – we’ll consider whether this affected what someone did next.”
So, while GAP cover is certainly the new buzz word in car insurance, and while it has clear benefits if you’re going in with your eyes very much wide open, take care not to get swept up in the publicity. As with all forms of insurance, it’s critical to know what you’re getting into, whether it’s the right product for you and how far down the fine print goes.