Guaranteed asset protection insurance
Cover for the gap between the indemnity paid by the motor insurer on a total loss, based on the vehicle's value, and the balance still owed on its financing or its purchase price.
A new vehicle loses a large share of its value in the first years. In case of theft or total loss, motor insurance usually pays the vehicle's value on the day of the loss, set by an assessor. Yet a buyer who financed the car with a loan or a lease with purchase option often still owes more to the finance company. The difference falls on the buyer: paying for a vehicle no longer owned. So-called GAP insurance covers this gap. Depending on the plan, it pays the difference between the indemnity and the outstanding balance, or between the indemnity and the original purchase price, which amounts to an extended new-for-old cover. It is very common in long-term leasing and leases with purchase option, where the lessor imposes or systematically offers it, and it is often sold by the dealer or finance company at the time of purchase. This distribution model drew criticism in the United Kingdom, where the regulator found very low loss ratios and sales pressure, and imposed rules so that customers have a cooling-off period and comparable information before buying. The product illustrates affinity insurance sold at the point of sale, useful but often expensive.
Textbook case: two years after buying a 35,000 euro car on credit, the vehicle is stolen. The motor insurer pays 24,000 euros, the assessed value, while the outstanding loan is 29,000 euros. The GAP policy bought at the dealer pays the 5,000 euro difference.
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