Guaranteed Asset Protection (GAP) insurance was originally sold to cover the "gap" between the amount paid out by a motor insurance policy and the amount still to be repaid on the finance that was taken out to buy the vehicle (where that amount was larger).
However, over the past few years, the product has developed and there are now other types of cover available. All require a successful claim to have already been made on a motor insurance policy, where the vehicle was a total loss ("write-off"). The three main types of this insurance are:
In the cases we see, consumers often say that:
As with any other insurance product, all benefits and significant or onerous exclusions should be brought to the attention of the consumer before the sale of the policy is concluded.
The specific issues that we see in relation to the mis-sale of GAP insurance include the consumer claiming that:
In deciding whether the policy was mis-sold we will consider:
Where they are available, we will examine any "key features" document, sale documentation (such as an application form) or phone recording.
But as GAP insurance is generally linked to the sale of cars, it is often sold face-to-face in a car showroom and there may well be no evidence of what was discussed. In these cases we will consider the accounts given by both sides as to how the sale was carried out.
Like in any other insurance sale, the seller should have complied with the Insurance: Conduct of Business Sourcebook (ICOBS) rules during the sale. A call recording or signed sale documentation may well be sufficient to show that the financial business has satisfied the ICOBS requirements.
We will also consider whether any advice was given to buy the policy.
"Suitability" is only an issue for "advised sales". So if we decide that the sale was "non-advised", then suitability is not relevant. In order to be a "non-advised sale" there must be evidence that the consumer knew that they wanted to buy GAP insurance without receiving any advice – for example, if the policy was bought over the internet or the consumer made an informed choice after considering all of the information.
However, we are likely to say that a sale was advised if the consumer was unaware of GAP insurance until the policy was sold or did not have enough information to make an informed choice at that time.
If we decide that some advice was given to the consumer to buy the policy, then we will look at whether that advice was suitable.
If the consumer says that they were sold the "wrong" product, or one that was not suitable for their needs, then we will look at:
Although not every seller offers all types of GAP insurance and the seller is not expected to refer potential customers to other sellers, we usually expect the seller to explain the product, its major benefits and any exclusions. If the policy was clearly summarised, we usually find that it was not mis-sold.
Some consumers claim that had the policy not been mis-sold, they would have acted differently, for example:
Our starting point will be evidence provided by the consumer about how the mis-sale affected their behaviour.
If we decide the consumer would not have acted differently if the policy had not been mis-sold, we are likely to say that the consumer was not "prejudiced" and so no remedy is appropriate. Similarly, if a claim has been settled with a payment that is greater than the original premium (plus interest of 8% simple per year), then we are likely to decide that the consumer has not been prejudiced and so no remedy is appropriate.
We will consider whether any of the terms breach the UTCCR. Under the UTCCR any term that is unfair is treated as if it did not form part of the contract terms and the insurance policy is applied without that term being given any effect.
If the consumer put down a large cash deposit and only used a small amount of finance when buying the vehicle, it is possible that at no time would any claim be paid – because the motor insurer's claim settlement would almost certainly be more than the outstanding finance.
There are also other situations in which it becomes clear that there is no “gap” between the outstanding finance and the vehicle’s market value, particularly if the vehicle was second-hand. In any case where there is no “gap” between the outstanding finance and the vehicle’s market value, we usually decide that the policy was mis-sold.
Sometimes the finance agreement taken out to purchase the vehicle includes additional funds for some other purpose – for example, to clear another loan balance, and so is for more money than the vehicle's purchase price. The insurer will treat the extra money borrowed as "negative equity" and will turn down payment for these costs, as policies usually define "purchase price" to exclude any additional amount. Consumers sometimes say that this was not explained during the sales process. This is an allegation of mis-sale.
We sometimes see complaints where the consumer's claim is accepted, but they are disappointed with the amount paid – because it was not enough to pay off all of the outstanding finance. We also see complaints where the insurer, despite accepting that the claim was valid, says that the consumer is not entitled to any settlement at all.
It may be that the insurer has not calculated the settlement correctly or that the consumer does not understand the terms of the policy. We will, therefore, examine the policy terms and check the figures to see whether the settlement has been made in accordance with them.
Most policies say that only the finance specifically used to buy the vehicle is covered under the policy. The policy usually contains a definition of purchase price or net invoice selling price. This will normally include VAT and manufacturer's factory-fitted options, but exclude dealer options, warranty charges, insurance premiums (including GAP), road fund licence and any other warranty/add on. It may also say that the purchase price is limited by reference to Glass's Guide "retail value" at the time of purchase and/or at the point of loss.
Sometimes consumers will claim that they did not understand these terms at the point of sale as they were not explained properly. We will then consider whether the policy was mis-sold.
When we see cases where the consumer says the insurer wrongly rejected a claim, we look to see whether the claim was considered in accordance with the policy terms and conditions.
Most GAP policies have a number of standard exclusions which insurers may refer to when rejecting claims, for example, if:
However, other exclusions are often included as well, for example, if:
When a claim has been rejected because the finance was in the name of someone other than the policyholder, we will consider whether the term is fair and whether the breach of it was relevant to the loss.
When a claim has been rejected because the consumer turned down a new vehicle replacement, we will look at the wording of the clause carefully. However, we may decide that it is not unreasonable for the GAP insurer to reject the claim, since there would have been no loss if a replacement vehicle had been provided. If the consumer claims that this restriction on cover was not explained, we will consider whether or not the policy was mis-sold.
GAP insurers sometimes say that the consumer accepted an offer from their motor insurer that was less than the market value for the vehicle. In these cases, the GAP insurer is not responsible for the shortfall. We will look at the motor insurer’s settlement and sometimes suggest to the consumer that they take the matter up with the motor insurer.
But there are some circumstances where we may ask the insurer to pay the claim even if the motor insurer did not pay out. In these cases we usually say that the GAP insurer should pay the difference between the amount that the consumer should have received (for example, the retail book price) and the outstanding finance.
GAP insurance policies only pay out once a claim under a motor insurance policy has been accepted and settled – because this is when the "gap" becomes known. We see cases where the consumer has had to continue to pay the finance on the vehicle while waiting for the motor insurer to settle the claim.
GAP insurers are not responsible for delays caused by motor insurers not accepting/paying a claim or finance providers failing to provide requested information. Consumers should take up delay issues with the business that caused the delay. If that business is covered by the ombudsman service, the consumer can bring a complaint to us.
We see cases where consumers complain that although they have cancelled their GAP insurance policy, the insurer has not refunded any of the premiums. Insurers often point to a clause in the policy that no refund is given when a policy is cancelled outside the "cooling off period".
Our view is that this type of clause is a significant feature of the policy – so should be drawn to the consumer's attention at the point of sale. If the consumer says that this didn't happen, we will consider whether or not the policy was mis-sold, particularly if the policy also states that it cannot be transferred to cover another vehicle or owner.
We generally say that if a claim has been paid, it is not reasonable to ask the insurer to make a refund – even if there is time left on the policy. But if a claim has been paid that was for less than the total of all the premiums paid, we may ask the insurer to pay the difference.
If we decide that a policy was mis-sold, we will normally say that the insurer should refund all of the premiums the consumer has paid plus interest of 8% simple per year. We will also consider whether a payment of compensation for distress and inconvenience is appropriate.
But if we decide that the exclusion was unfair or unusual and was not brought to the consumer’s attention, or that the consumer would have been able to obtain a policy elsewhere which would have covered their claim, then we may ask the insurer to meet the claim as if the restriction was not part of the policy terms.
Similarly, if we decide that the mis-sale meant the consumer was entitled to rely on statements and representations made by the seller, then we may decide that compensation should be paid either for distress and inconvenience or for the full amount of the consumer’s claim under the GAP policy, depending on the considerations set out above in relation to the particular claim involved.
contact our technical advice desk on 020 7964 1400
This is part of our online technical resource which sets out our general approach to complaints about a wide range of financial products and issues. We would like your feedback on how helpful you found it. Please also use the feedback form below to tell us about anything you think we could clarify or explain better.