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Halloween is a time for scary stories. But for a motorist whose car has been stolen or written off, an unwelcome shock can arrive with the insurance settlement.
The amount offered may be less than they originally paid for the car. It could also be less than the amount needed to settle their finance agreement.
That difference is often called a settlement shortfall. Understanding how it can happen is useful long before you need to make a claim.
Why might your insurance pay less than you paid?
When you buy a car, the purchase price reflects its value at that point. As time passes and the mileage increases, its market value can change.
Following an eligible total loss claim, a standard motor insurance policy will generally base its settlement on the vehicle’s market value immediately before the loss, subject to its terms. That is not necessarily the amount on your original invoice, the cost of a replacement, or the balance of your finance agreement.
Some motor insurance policies include new-car replacement cover in certain circumstances. Agreed-value policies can also work differently, so it is important to understand your own cover.
The potential shock comes when the settlement figure and your expectations are some distance apart.
What could a shortfall look like?
Imagine you bought a car for £30,000. Some time later, it is written off, and your motor insurer agrees a settlement of £22,000.
For this simple illustration, we will leave aside any excess or other deductions.
If you own the car outright, the settlement is £8,000 below your original purchase price. You have no finance balance to clear, but returning to your original £30,000 budget would require another £8,000.
If you still owe £25,000 on a finance agreement, the £22,000 settlement would leave a £3,000 difference to address.
These are two different measures of a shortfall. The difference from your purchase price and the difference from your finance balance are not added together.
The figures are illustrative, but they show why “my car is insured” and “I can recover everything I paid” do not necessarily mean the same thing.
Where can GAP Insurance help?
GAP Insurance is designed to help with specified financial shortfalls following an eligible total loss, depending on the type of policy purchased.
Different policies use different reference points:
- Lease GAP can help address an eligible shortfall between the motor insurance settlement and the outstanding lease settlement.
- Return to Invoice GAP can help bridge the difference between the motor insurance settlement and the original purchase price.
- Vehicle Replacement GAP can help towards the cost of a qualifying replacement vehicle, as defined by the policy.
Some products combine elements of these benefits. Lease and contract hire agreements have their own cover options, like deposit protection for your advanced rental.
The policy wording determines how a claim is calculated, what is excluded and how much can be paid. GAP Insurance does not replace your comprehensive motor insurance or pay for ordinary repairs.
Three things to check before buying GAP cover
1. Does your motor insurance include new-car replacement?
If it does, check how long that benefit lasts and the conditions that apply. Understanding your existing protection helps you assess whether GAP cover would be useful and when you might need it. Deferred GAP Insurance could be worth considering.
2. Which shortfall do you want to protect against?
Clearing an outstanding finance balance is a different objective from protecting your original purchase price or the cost of a replacement vehicle.
Think about what you would want to achieve after a total loss, then compare that with what the policy actually covers.
3. Are you eligible, and are the limits suitable?
Check the purchase window, vehicle eligibility, length of cover, claim limits and exclusions. If something is unclear, ask for an explanation before buying.
It is also worth understanding the claims process, including when you should contact the GAP claims administrator before accepting a motor insurance settlement.
Leave the surprises to Halloween
A write-off is stressful enough without seeing a nasty shock turn into a full-blown horror story.
Taking a little time to understand your car’s value, any outstanding finance and your insurance protection can help you make a more informed decision.
To explore the different types of cover, visit Total Loss GAP and compare the options with your circumstances.
Examples are illustrative. Cover, eligibility and claim payments depend on the terms, conditions, exclusions and limits of the policy purchased.