Lots of motor insurance policies claim to include cover for a brand new vehicle on a new-for-old basis during the first year of ownership. In theory this means that if your car is written off during the first year of ownership, your motor insurer will physically replace your vehicle with a brand new one.
What does this mean for GAP insurance – do you still need it?
This article explores that very question.
Consider… your car that you bought brand new less than a year ago has been written off as a result of accident, fire, theft or flood. Under the heading of “New Car Replacement Cover”, your motor insurance policy terms and conditions state that they will replace your vehicle with a brand new one, but is that actually the case?
Sadly, it’s not always.
The issue is the criteria that you need to meet in order to qualify for a new-for-old replacement vehicle. Most motor insurance policies featuring such new-for-old cover normally say something along the lines of the following:
“If your vehicle is stolen and not recovered or is damaged and the cost involved in the repair will be more than 60% of the manufacturer’s list price at the time of the loss or damage we will replace your vehicle with a new vehicle of the same make and model.
We will only replace your vehicle if you and any other known interested parties agree. The vehicle being replaced will become our property.
We will only do this if a replacement vehicle is available.
If we cannot obtain a replacement vehicle of the same make and model we will pay you the market value of your vehicle and its fitted accessories and spare parts at the time of the loss or damage.”
(Emphasis added in red)
There’s a few questions you then need to consider. Let’s tackle each of the above areas of concern in order:
1. The damage repair bill must exceed a certain percentage of the manufacturer’s list price for a new equivalent vehicle.
What if the repair bill falls short of that percentage?
This is important because lots of motor insurance providers will usually deem a vehicle to be a Total Loss (aka “write it off”) if the cost of repairing the damage to the vehicle exceeds circa 60% of what your vehicle is worth at the time of loss.
For example… if your vehicle is worth £20,000 at the time of loss, most motor insurers would consider your vehicle to be a write-off if the cost of repairing damage to your vehicle exceeded £12,000 (60% of £20,000).
But, if the list price of a new equivalent vehicle at the time of loss is for example £25,000, most motor insurers featuring new-for-old cover would require the repair bill to exceed £15,000 (60% of £25,000) in order for you to qualify for a new-for-old replacement vehicle.
What happens if the repair bill comes in at £14,000? Would your motor insurer repair the vehicle come-what-may, or would they revert to a cash payout? If so, how would that cash payout be calculated? Frustratingly, I haven’t yet seen a motor insurance policy that clarifies this adequately within their wordings.
If the result was a cash payout based on the original invoice price you paid, then you may consider not having GAP insurance within the first year. However, if they were to revert to a market value payout, it would be prudent to have GAP insurance in force within the first year as a safety net.
2. Anyone (e.g. the finance company) who has an interest in the vehicle has to agree.
What if the finance company rejects the offer of a replacement vehicle and insists on a financial settlement instead?
Ultimately, if your vehicle is financed, the vehicle is the property of the finance company until such time as you’ve repaid the full amount due to them. In the event the vehicle is written off and you do qualify for (and are offered) a new-for-old replacement vehicle from your motor insurer, the finance company has the right to accept or reject the replacement vehicle.
This being the case, there are then further questions to consider before electing to NOT have GAP insurance in the first year:
- Speak to your finance company and ask: In the event that the vehicle was written off within the first year (or two years with some insurers) and the motor insurer offered you a brand new physical replacement vehicle in lieu of a cash settlement, would the finance company accept the physical replacement vehicle or would they insist on a cash settlement instead?
I should stress here that this is a question that you need to pose directly to the finance company themselves and NOT the dealership that you bought the car from, nor the vehicle/finance broker etc. This is an important point because if you ask anyone other than the finance company directly, you’re very likely to only get an explanation of what they *think* will be the case. If your vehicle is written off, you’ll be dealing directly with the finance company themselves, so it is best to get the answer directly from them in advance.
If they tell you that they would be inclined to reject the offer of a replacement vehicle and insist on a cash settlement instead, you should speak to your motor insurer and ask:
- In the event that your vehicle was written off and you qualified for (and were offered) a new-for-old replacement vehicle, but your finance company rejected that and insisted on a cash settlement instead, how would they calculate the amount they’d pay out in settlement of your claim? Would they pay out the cash equivalent of the new-for-old replacement vehicle, or would it be a sum equal to the original price you paid, or would they revert to a market value payout?
Why would your finance company reject a new-for-old replacement vehicle from your motor insurer?
This is the subject of hot debate but, in simple terms, by allowing you to receive a newer vehicle than the one that was written off, they’d be allowing you to potentially profit from that vehicle having been written off.
Consider… you agree to fund your vehicle by way of a 3yr PCP agreement. You’ll pay an initial deposit followed by 35 monthly rentals and they’ve told you that they guarantee the future minimum value of your vehicle to be £X at the end of the PCP term. This guaranteed future minimum value (GFMV) being an amount that you can either pay (and keep the vehicle) or, if your vehicle is worth less than that figure, you can hand the vehicle back and walk away. Or, crucially, if your vehicle is worth more than the GFMV, you can sell it (or part-exchange it) and use whatever equity there is against the cost of your next car.
Now let’s say that your vehicle is written off when it’s 11 months old and your motor insurer offers (and your finance company accepts) a new-for-old replacement vehicle. Fast forward to the end of your 3-year PCP agreement and you’re now faced with being able to sell a vehicle that is 11 months newer (and therefore more valuable) than the vehicle that you would have originally had, but for it having been written off 25 months prior.
That 11-month higher vehicle value, goes straight to your pocket in terms of equity for you to either keep, or use against the cost of your next vehicle. Courtesy of the original vehicle having been written off.
I don’t think this is surprising that a finance company might object to this, preferring instead for you to have received a cash settlement from your motor insurer when writing the vehicle off so that the original finance agreement can be wrapped up.
With many motor insurers then treating this as though a replacement vehicle wasn’t available at the time of claim and reverting to a Market Value payout instead, you’d require a GAP insurance policy to step in and pay the shortfall.
3. A vehicle has to be available.
What does “available” mean?
If a new-for-old version of your vehicle is in stock at a dealership and available for immediate delivery then it’s likely to be pretty straightforward, but what if a new version of your exact vehicle isn’t in stock anywhere and would therefore require a factory order? What if that factory order might mean a wait of up to six months before the vehicle delivery? Is that still deemed to be “available” by your motor insurer?
What if the only “available” version of your specific model of vehicle has been superseded since you bought yours, with perhaps a better trim level or different/improved engine? Is that still deemed to be the “same model” and “available” or would your motor insurer consider it to be a different vehicle and therefore unavailable?
If your motor insurer deems an equivalent vehicle is NOT available, how will they settle your claim? Will it be a sum equal to the original invoice price that you paid for your vehicle, or will they revert to a market value payout?
Two Year New-For-Old Cover.
Some motor insurers claim to offer new-for-old cover for two-years from first registration. The biggest players who do so (at the time of writing this) are SAGA and NFU.
Whilst some people may then assume that they don’t need GAP insurance for the first two years, it’s worth noting that there can be limitations. For example, the SAGA policy sees the second year of new-for-old cover forfeited once the vehicle reaches 12,000 miles. This could prove problematic for those people who will drive more than 12,000 miles within that two-year period.
Additionally, if they require the damage repair bill to be more than 60% of the list price of a brand new equivalent vehicle at the time of claim, the list price of a new equivalent vehicle might have increased by a fair chunk over a two year period – which places further emphasis on the first point in this article.
GAP insurance can only be purchased within a limited time-period.
At the time of writing this article, we permit our Invoice and Replacement GAP insurance policies to be purchased up to 90 days after taking delivery of the vehicle. If you go even one day past this, we can’t provide you with any form of GAP insurance at all.
Pre-registered, nearly-new and leased (contract hire) vehicles are usually excluded from new-for-old cover from a motor insurer.
With very few exceptions, new-for-old cover from a motor insurer is only available for brand new vehicles at first registration. Therefore pre-registered, nearly-new, and vehicles that are the subject of a contract hire agreement, are almost always excluded from such cover.
Sadly, I’ve spoken to a number of people over the years who didn’t realise this, didn’t buy GAP insurance and then their vehicle was subsequently written off. As you can imagine, it’s a very expensive mistake!
Should you defer the start date of your GAP insurance policy or not?
We recognise that some of you may have total confidence in the cover provided to you by your motor insurer during the first year of ownership and, as a result, may not wish to have GAP insurance in place during the same period.
However, I can’t stress enough that you should NOT blindly place trust in your motor insurance policy, as this article hopefully reflects – and I’ve not even got in to the questionable examples we’ve seen of motor insurers blatantly shirking their obligation to even offer a new-for-old replacement vehicle when their policy wordings said they should have done. But that’s a separate blog article to come.
With the market as it is at present, we no longer think it prudent to defer the start date of a GAP insurance policy. For all the reasons I’ve explained above it just makes sense to have the GAP insurance policy run alongside your motor insurance policy and IF your car is written off within the first year and IF you did qualify for and received a new-for-old replacement vehicle from your motor insurer, we’ll simply transfer the remaining duration of your policy to your new vehicle.
Please, take the time to consider the points I’ve raised, pose the questions that need to be asked of the right parties and come to an informed decision as to the best way to proceed. If you need assistance with this, my team and I are more than happy to help – please contact us.
Thank you for reading, and I hope this helps.
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Who am I?
I founded the UK’s very first independent online provider of GAP insurance back in March 2004 and this has evolved into the GAPinsurance.co.uk that you see today. Over those years I’ve been the champion of the UK car-buying consumer, doing my best to help them avoid being overcharged by and/or mis-sold to by motor dealers charging vastly inflated prices for what are often sub-standard GAP insurance policies. In the face of increasing competition from companies offering budget policies (via insurers who have ultimately gone bust), I’ve led the way with market-defining policy refinements and at all times stuck with large A-rated insurers with the financial clout to ensure they’ll still be around if/when the need to claim arises. I don’t, and never will, offer budget policies. I sell the right policies, at the right price.