It’s often said that if you can think of it, you can insure it.

That’s why it’s possible to insure against alien abduction, or buy cover for body parts for large sums if you’re famous for that particular body part.

But leaving aside comedy or frivolous policies, insurance covers a wide and diverse range of things and scenarios. Some more necessary than others.

A decade ago, a mis-selling scandal erupted around identity theft insurance and card protection insurance. The Financial Conduct Authority (FCA) felt some firms were mis-selling these policies. That’s because should your identity or your bank and credit cards get stolen… you’re already covered by the card provider or financial institutions. In other words, the policies were more or less irrelevant.

There are lots of other insurance policies that are either rubbish or surplus to requirements. I question the value of gig insurance, for example, as you’re entitled to a refund if the gig is cancelled or rescheduled. Others, like warranties, are often so unfairly worded that it’s hard to see under what circumstances they would pay out.

But there’s one widely sold type of insurance that’s been in the news recently, that some financial specialists are suggesting might be the next mis-selling scandal. GAP insurance.

What is GAP insurance?

When you buy a new car, it begins to depreciate in value after you’ve purchased it and driven it off the forecourt. A lot. So a vehicle that costs £10,000 to purchase might be worth when £7,500 it’s out in the world. Sometimes the value of your car can decrease in value by well over 50-60% in just three years.

Motor insurance policies cover you for what it costs to repair or replace the vehicle, not what it cost when it was new. So if something happens to your car a few weeks after purchase, you won’t get £10,000 for a successful claim – you’ll get £7,500 (or whatever its costs to replace the car at the point you claim).

So far so good. After all, if you buy a replacement vehicle that’s the same make/model/milage, then you’re in more or less the same position as you were before. But if you’ve taken out a finance agreement to pay for some or all of the car, then you still owe the credit provider what you borrowed from them. This means you could find yourself short a couple of thousand pounds once you’ve got your insurance payout. You’ll also be paying interest on the credit agreement too.

GAP insurance exists in many forms, but it’s main reason for existing is to fill that gap. Because nothing is ever straightforward in finance, it actually stands for ‘Guaranteed Asset Protection’ insurance. If your vehicle gets written off, then the policy should plug the gap between what it cost versus what it’s worth, by paying out the missing cash from the car’s reduction in value.

What’s the problem with GAP insurance?

The FCA flagged up concerns about the sale of GAP insurance last September after they reviewed the general insurance industry to see if people were getting good value for their policies.

The report is pretty complex but in short, the FCA found two main concerns

Value for money

The FCA’s investigation found GAP insurance policies found that the profit insurance companies make in premiums from these policies is far higher than other forms of insurance. In fact, according to the FCA’s data, only 6% of the amount customers pay in premiums is paid out in claims.

This is dead complicated, but in short, the amount of money you pay in, verses what ultimately gets paid out when people make a successful claim is very low. With stand-alone policies, it’s 6.8% of the total premiums paid and 4.37% for add-on policies. For comparison, with home and contents insurance, just over half of all premiums paid in get paid out. That means the FCA has concerns that the policies aren’t ‘fair value’ for money.

Commission

The FCA also found that some firms were ‘paying out 70% of the value of insurance premiums in commission to parties involved in selling GAP policies’.

That statement is of particular concern, because in the past we’ve already seen one major mis-selling scandal involving financial products and excessive commission: PPI.

On top of that we’ve also recently seen the Financial Ombudsman uphold complaints about commission on car finance agreements. This has prompted the regulator – who has already banned discretionary commission on these agreements – to announce its suspending complaints while it decides what happens next with car finance commission. In practice, this might mean a compensation scheme.

Given that GAP insurance is often sold by those same car dealerships that arranged the credit agreements, this latest news could mean two chunks of excessive commission have been charged on just one car purchase.

What does this mean in real terms?

Let’s be honest, if you’re still with me at this point, I wouldn’t blame you for feeling confused. After what feels like an eternity reading reports and contracts, my brain is begging for mercy. And that’s probably why the sale of GAP insurance hasn’t crossed anyone’s radars until now.

So let’s try this in plain English. GAP insurance is concerning financial experts for four reasons:

  • It’s possible you didn’t need to take out the policy. This may be because you were mis-sold it (for example: you didn’t use finance to buy the car or you had a ‘new car replacement’ agreement).
  • Your policy isn’t fairly written (the T&Cs aren’t fair or are so ambiguous you couldn’t have made a successful claim).
  • The FCA rules around the sale of GAP insurance were not followed (you were sold the policy on the same day as the car sale, for example).
  • You’ve been charged excessive commission on the policy.

For most people, GAP insurance isn’t really necessary if you’ve not paid for the vehicle using finance, because you’ll get a like-for-like replacement if you have to make an insurance claim and your car is written off.

In addition, most dealerships have what’s known as a ‘new car replacement’ deal if your car is written off or stolen in the first year. As a result GAP policies should start from year two – they aren’t necessary during the first year.

GAP insurance and mis-selling

The problem with GAP insurance – and indeed the myriad of other insurance products often tagged on by car dealerships (windscreen insurance, alloy wheel cover, etc.) – is people feel pressured into buying at the point-of-sale. This is became of the ‘what if’ factor: the fear of something going wrong that you could have insured against, but failed to purchase at the time.

In fact, there are a number of rules relating to the sale of GAP insurance that if not followed, mean you policy might have been mis-sold. For example:

  • The seller must tell you that you don’t have to buy from them and you can buy a policy elsewhere.
  • You should not be sold GAP insurance on the same day you are sold your vehicle. The must be a break of at least two days before this permitted (beware of being pressured to waive this period).
  • You should be told the how long the policy runs for, when it begins and the total you’ll pay, along with whether the policy is a requirement of the policy or an add-on.

As with many things sold at point-of-sale, there are often much cheaper options out there online if you stand firm and shop around.

What happens next?

The sale of GAP insurance is currently suspended through 80% of the businesses that operation within this sector while the FCA investigates. But you are still able to complain if you think you were mis-sold a policy.

If you don’t think the policy was suitable for your needs, then you can make a mis-selling complaint and take it to the Financial Ombudsman for free if the firm turns you down. Commission is a little trickier to pin down at this stage as it’s not obvious on your policy. But watch this space and we’ll keep you posted.

Featured in Times Money Mentor – Martyn James

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