Drivers who have a new car written off or stolen and expect the insurance company to offer the full cost of replacement may be in for a surprise when their claim is turned down.
Even motorists with comprehensive cover are unlikely to pick up new for old replacement if they have owned the car for more than a year.
This shortfall between the claim pay out and the cost of the car can leave car owners in debt because the finance company still wants their money regardless of what’s happened to the car.
The insurer will opt to pay the current market value of the car – that’s more than the trade-in price but less than the retail price
The solution for many drivers is special insurance which covers the gap between the insurance settlement and the price of the car.
As an example, gap insurance on a car purchased for £12,000 that is written-off three years later when worth around £5,000 would meet the £7,000 difference.
Gap insurance is a standalone policy with a separate premium paid alongside standard car insurance cover.
Gap insurance is not suitable for every car owner, but has three key uses:
Bridging the negative equity between the finance deal and value of the car
Settling contract hire deals if a car is written off or stolen and the driver must have transport
Protecting the equity in an expensive car that depreciates quickly
Dealers will try to sell gap insurance with every new car because they earn commission on the deal, but most motorists will find a better deal shopping around.
Points to consider include whether the car insurer offers new for old replacement in the first 12 months of ownership – if they do, there’s no need to pay the extra premium for gap cover or look for a policy with a deferred start.
Terms vary between gap insurers as well – check out maximum vehicle values compared with maximum payouts because they won’t be the same.
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