Gap insurance - when total loss means total loss

Why you can't keep the car if it's written off

Vehicle Total Loss Gap Insurance

The purpose of gap insurance is to insure you against total loss - putting you back into the position you would have been in if your car hadn’t been written off.

Gap insurance restores the value of your vehicle to you, but nothing more. This is a good thing - it means it’s fair and not misused. One of the things that the terms of gap policies specifically state is that salvage (buying your car back from your motor insurer) invalidates gap insurance.

Why is this? Well, remember that the gap insurer is taking on the risk of you being out of pocket in the event of total loss. Gap insurance underwriters calculate their risk accordingly and policy prices are based on the wording of the policy and that alone, so they have to be precise and the terms have to be stuck to.

So how might salvage - buying back your vehicle if it is a total loss - put you in a different position to simply ‘not out of pocket’?

Let’s look at an example. Say a car cost £10,000 and the owner has comprehensive motor insurance, plus gap insurance to cover that value. After a couple of years it’s worth slightly less - say £8,000. Damage to the vehicle requiring repair of more than 50% of its value is regarded as a total loss by the motor insurer - so any damage that costs £4,000 to repair by the insurer’s repair garage would trigger the vehicle being declared as a total loss. This could easily be something like the theft of alloy wheels.

At that point the insurer would deem the vehicle uneconomical to repair and declare it a total loss. It would offer the car owner £4,000 - and gap insurance would make up the difference of £6,000. At this point the owner has £10,000 and the car is signed over for disposal. This is gap working as it should.

However, if the owner decides offer the insurer £3,000 to buy the car as salvage and source their own wheels for say £3,000, the net result is their car plus £4,000 cash. Technically, this counts as ‘betterment’ and is beyond the terms gap insurance. Remember, the point of gap is to put you back where you were, not back where you were plus a cash payment. That’s trying to have your cake and eat it.

Insurance is an industry that depends on fairness and people sticking to the rules - it’s about calculating risk as accurately as possible and charging premiums so that the claims can be paid to people that need to claim out of the premiums of those that don’t. It’s tricky to get it right - premiums too high and not enough people insure for the pool to work, premiums too low and claims exceed the money available. Neither works for long as a way to run a business.

So, we stick to the rules that ensure the whole industry works - and everyone is put back to where they were. No less - and also no more.

Sometimes it doesn't look as though the damage is so severe and you could have it fixed up yourself, even if it's not economic for the insurer to do so. It's tempting to go down this route - but it will invalidate your gap policy.

Put simply, it's not worth it.

by Beate Kubitz at 16 Jan 2020, 00:00 AM