Why a lease car can leave a gap after a write-off
If a car is stolen or written off, a comprehensive motor insurer normally pays the market value of the car immediately before the loss, less any excess. Market value is what a similar car would fetch, not what you paid for it and not what you owe.
On contract hire the funder owns the car. If it is written off, the agreement usually ends early, and the funder will calculate a settlement figure. How that figure is built is set out in your agreement and differs between funders. It may relate to the rentals still to be paid, to the funder's projected value of the car at the end of the term, or to a mix of the two, plus any charges.
The settlement can end up higher than the insurer's payout. One reason is that the car's market value has fallen faster than the funder's own schedule assumed. Another is that the funder's figure includes fees or other charges. Neither is certain on any given lease, which is why the agreement matters.
That difference is the gap. The funder is the party owed the money, and unless something covers it, the lessee is normally liable to the funder for it under the agreement. That liability does not disappear because the car has gone.
The two main types of GAP: return-to-invoice and contract hire GAP
Return-to-invoice GAP pays against the price of the car, which is of little use on a lease because you never owned it. Contract hire GAP is tied to the funder's settlement figure, which is what you actually owe.
A policy sold for a purchased car will not necessarily suit a lease, so read the policy wording rather than the marketing name.
| Type | What it is designed to cover | Usual fit |
|---|---|---|
| Return-to-invoice GAP | The difference between the insurer's payout and the original invoice price of the car, which may include some extras | Cars bought outright or on purchase finance such as PCP or HP, where you are the owner or heading towards ownership |
| Finance GAP | The difference between the insurer's payout and the outstanding finance balance | Purchase finance |
| Contract hire GAP | The difference between the insurer's payout and the funder's early termination or settlement sum under a lease | Personal and business contract hire |
What contract hire GAP typically covers
Cover varies by insurer and policy, so treat this as a guide to the mechanism rather than a promise. In general, contract hire GAP pays the shortfall between the motor insurer's settlement and the amount the funder asks for under the agreement's early termination terms.
It is usually triggered by a total loss, meaning theft where the car is not recovered or damage the insurer deems uneconomic to repair. The policy typically pays the gap to the funder or to you, depending on its terms.
Some policies also reimburse the motor insurance excess, usually up to a stated limit. Not all do, so check whether this is included.
Policies may be sold with a single premium paid once, or with premiums paid in instalments, depending on the provider. Do not assume one structure. The premium and the policy limit are set by the provider, so compare the wording, not just the cost.
Typical exclusions to check
Exclusions are where most disappointment comes from. Look for these in any policy document before relying on it.
- Unpaid or arrears rentals before the date of loss.
- Damage charges, excess mileage charges or fair wear and tear costs. See fair wear and tear explained for how these are assessed.
- The motor insurance excess, unless the policy specifically includes it.
- Losses where the motor insurer declines the claim, for example because of unlisted drivers, misrepresentation or unlawful use.
- Cars that are repaired rather than written off. GAP applies to a total loss, not a repair bill.
- Voluntary termination or handing the car back early. That is not an insured event.
- Policy limits, which cap the amount paid, so a large gap may be only partly covered.
- Cover not being in force, for example because the policy lapsed or the car was not within the eligible age or value band.
When GAP makes sense on a lease
The size of the gap is not constant. It is often largest early in the term, when the car has lost value quickly and the funder's settlement figure is still high. It tends to narrow later, although that depends on the agreement and the car.
GAP is most worth considering if any of these apply:
- Your lease agreement or funder requires it, in which case it is not optional.
- The car is a model that depreciates quickly, or the term is long and the early termination sum is large.
- You paid a large initial rental. See initial rental explained. Whether the settlement reimburses it depends on the agreement.
- You could not comfortably fund a four-figure shortfall from savings.
- Your motor insurance is not a policy that already includes a GAP-style benefit.
When you may not need it
Some leases already include protection. A funder may bundle a form of GAP into the agreement, or an all-in package may include it alongside insurance. Check the paperwork, and read leasing with insurance included to see how packages differ.
A small number of motor policies may include a limited GAP or new-car replacement benefit, often for a set period after registration. This is not universal, and the terms are policy-specific. Confirm the wording and whether it applies to a leased car, where the funder owns the vehicle.
It is also worth asking the funder how its settlement figure is calculated and what it would be at different points in the term. That tells you how large the gap could be, and when.
If you could absorb the shortfall, you may reasonably decide the premium is not worth it. That is a personal risk decision, not a rule. A simple worked example shows the scale.
A worked example (illustrative only)
Suppose, purely for illustration, that a car is stolen and never recovered. The motor insurer values it at £17,000 and deducts a £500 excess, so it pays £16,500. The funder's settlement figure under the lease is £19,000.
The shortfall against the payout is £2,500. That £2,500 already includes the £500 excess: £2,000 is the difference between the settlement and the insurer's valuation, and £500 is the excess taken off the payout. The excess is not a further cost on top.
Here is how that splits, using the same invented figures:
- Funder's settlement: £19,000.
- Insurer's valuation: £17,000, less £500 excess, gives a payout of £16,500.
- Shortfall against the payout: £2,500, made up of £2,000 plus the £500 excess.
- If GAP covers the shortfall but not the excess: it pays up to £2,000 and you bear the £500.
- If GAP also reimburses the excess: it pays up to £2,500, subject to the policy limit.
What happens without GAP
Without GAP, the funder is owed the £2,500 balance and the lessee is normally liable to pay it under the agreement. That liability continues until it is settled. The figures are invented to show the mechanism, not to suggest typical values. Your own agreement's settlement terms will decide the real numbers.
For wider cover rules, see insuring a lease car. To understand what ending early involves, read can you end a car lease early.