Who owns a leased car and who insures it
On a personal or business contract hire lease, you do not own the car. The finance company does, and you pay to use it for a fixed term.
Ownership does not mean the finance company insures it for you. In almost every case you arrange and pay for the policy, and you are the policyholder. The lease agreement sets out what cover you must hold.
The main questions are straightforward. What level of cover does the agreement require? Who is allowed to drive? And what happens if the car is written off while money is still owed on it? The sections below take each in turn.
What lenders expect: fully comprehensive cover
Lease agreements typically require the lessee to hold fully comprehensive cover for the whole term. It is not usually optional, and you may be asked to show proof of insurance. Read the insurance clause in your agreement, as requirements on named drivers, excess limits or approved insurers can vary.
Fully comprehensive is a level of motor insurance written to include damage to the insured car, as well as damage to other people's vehicles and property and injury claims. The damage to the insured car element matters here, because it is what pays out if the leased car is damaged or written off.
It is a description of the level of cover, not a single standard product. Two policies that both carry the label can differ in their excess, their limits and their wording. The policy documents matter more than the label on the front.
If you are weighing leasing against other ways of paying for a car, the lease vs PCP vs HP vs buying tool sets out how the arrangements differ in structure.
GAP insurance on a lease
GAP stands for guaranteed asset protection. It is designed to cover the difference between what an insurer pays out on a written-off car and the amount the finance company is owed.
If the insurer's payout is lower than the amount owed, GAP is designed to cover the difference, subject to its terms. If the payout is not lower, there is no difference for it to cover.
GAP is a separate policy from fully comprehensive cover. Fully comprehensive deals with the claim on the car, while GAP is aimed at the shortfall. Having one does not stand in for the other.
The wording of any GAP policy sets out what it will and will not meet, including any limit on the amount it pays. Read those terms before relying on it. Also check whether your lease provider already includes or offers something similar, as some agreements do.
Named drivers
A named driver is a person listed on the policy who is allowed to drive the car. The policyholder takes out the policy, and others are added by name.
Listing a driver is a policy matter, so confirm with your insurer who is covered and how. Do not assume that a partner, friend or colleague is covered just because they have their own licence or their own insurance.
If someone not listed drives the car and has a claim, the insurer may refuse it. On a lease that is a serious problem, because a refused claim on a written-off car could leave you owing the finance company directly.
On a business contract hire lease, the same applies to employees. Each person who will drive needs to be covered, and the insurer should be told how the car will be used.
What happens after a write-off
A car is written off when the insurer treats it as a total loss. The insurer then settles the claim under the policy, based on its assessment of the car's value at the time.
That value can be lower than the amount you still owe the finance company, particularly early in a lease or where the car has lost value quickly. The lease agreement usually makes the lessee responsible for the shortfall, often through an early termination charge. Check your own terms to see how it is calculated.
Without GAP, the payout may not clear what is owed, and you could have to pay the difference yourself. With GAP, the policy is designed to cover that gap, within its limits.
Here is an illustrative example. Suppose the insurer pays £15,000 but the finance company is owed £18,000. The shortfall is £3,000, which you may owe unless GAP covers it. The figures are invented purely to show the mechanism.
For the wider picture of how a lease concludes in the ordinary way, see what happens at the end of a car lease. The can you end a car lease early guide explains early termination charges.
Comparing policies like for like
Comparing policies is simpler when you hold three things constant: the level of cover, the drivers and the declared use of the car.
Compare fully comprehensive with fully comprehensive, use the same named drivers each time, and describe how the car will be used in the same way on every quote.
Keep any GAP policy as a separate line, and note whether it is priced as a one-off, annual or monthly cost. That lets you compare it fairly with other options.
Once those variables are fixed, compare the things that remain: the excess, the policy limits and the wording.
Budgeting for insurance alongside the lease
Insurance sits on top of the monthly rental. Premiums vary widely with your age, postcode, driving history, the car and its value, so there is no reliable typical figure. Get quotes for the specific car before you commit to a lease.
A useful rule is to work out an annual premium and divide by twelve. Add the excess you could face, since a claim means paying that amount up front. Illustratively, a £900 annual premium adds £75 a month to the rental.
If you take GAP, add it using its actual pricing, whether a single payment or a yearly or monthly charge. Do not assume it is one-off.
The how much does it cost to lease a car guide covers the main parts of a lease price. The true cost of leasing calculator helps you add running costs to the rental, and the lease deal checker is an independent tool for checking the figures on a lease.