GAP insurance when your car is written off

What GAP insurance is

GAP insurance, sometimes called shortfall insurance, is designed to cover the gap between what you owe on your car loan and what your comprehensive car insurer pays out if the car is written off.

It works alongside comprehensive car insurance, which lenders usually require when you buy a car on finance.

An example

Say the total to repay on a car loan, including interest, fees and charges, is $22,000. The car is written off, and the comprehensive insurer pays its market value of $12,000. That leaves $10,000 still owing on the loan: the gap.

Check what your policy covers

Policies often have exclusions and conditions, and a limit. Sometimes the maximum a policy pays doesn't cover the whole gap. Other times it covers a bigger gap than you'll ever have.

Your certificate of insurance and policy wording set out your cover and limit. If you can't find them, you can ask the insurer for copies, or ask what cover you have.

If it was sold to you too soon

Add-on insurance sold with a car or a car loan is generally covered by ASIC's deferred sales rules. These stop it being sold until four days after the deferral period begins. For a car loan, that's generally when you're told in writing that the loan is approved, or when you're given the required information about the insurance, if that's later.

If it's sold in breach of those rules, you can return it for a full refund of what you paid, less any claim already paid. That right lasts about six weeks from the sale, so the timing matters.

If GAP insurance was added to your loan without you knowing, or you were misled about it, you may be able to get a refund. A free financial counsellor can help you work out whether the rules applied to your policy.

Why the market value payout still matters

GAP insurance tops up what your comprehensive insurer pays, and most policies have a limit. So the comprehensive payout, based on your car's market value or agreed value, is still the starting figure. You can check a market value offer against cars for sale in your state.

What does GAP insurance cover?

The gap between what you owe on your car loan and what your comprehensive insurer pays if the car is written off, up to the policy's limit and subject to its conditions.

Do I need comprehensive insurance for GAP insurance?

GAP insurance is designed to cover the gap left after a comprehensive insurance payout, so it works alongside comprehensive cover. Your policy sets out the conditions.

Can I get a refund on GAP insurance?

If add-on insurance was sold before the deferral period ended, you can generally return it for a full refund (less any claim paid) within about six weeks of the sale. If it was added without you knowing, or you were misled, you may also be able to get a refund.