Look out for Gap Insurance depreciation clauses

What is depreciation clause on Gap insurance?

Gap Insurance, like any other type of insurance, will have a certain amount of ‘small print’. This term is often associated with mistrust and suspicion by consumers, and in many cases rightly so. However, many of the leading providers have worked very hard to make the policy terms you are faced with much easier to understand.

In order to do this there has to be a concerted effort to eliminate terms that can cause confusion, and possibly a effect any settlement should a claim be made. One such clause is the so called ‘depreciation’ clause.

Dangers of a Gap Insurance depreciation clause

In the early years of Gap Insurance products we often saw a ‘depreciation’ clause in the policy terms. This basically meant that your settlement could be reduced due to the length of time that you take out the policy, or perhaps due to the delay in buying the policy in the first place.

If we take the first example, the insurer could depreciate your settlement for every year that you take your policy. This means that they could lessen the risk as the vehicle lost more and more value. Hardly the idea of ‘Gap Insurance’ at all! Thankfully this type of clause has all but been consigned to the history books.

The alternative form of ‘depreciation’ clause is where your settlement can be reduced due to you not buying your policy for a number of days after purchasing your vehicle. This may sound a little odd but some insurers, even though they may offer you the chance to buy cover up to 90, 105 or even 180 days after vehicle purchase, may lower your settlement due to the perceived loss of value of the vehicle between the vehicle purchase and policy purchase.

For example of you buy a vehicle for £20,000 on January 1st and then buy a Gap Insurance policy on May 1st then you settlement could be reduced by the loss in value between those two dates. If you vehicle lost £500 per month over that period then that could equate to a £2000 reduction in your policy settlement.

The effects of a depreciation clause on a Gap Insurance policy

What is depreciation clause on Gap insurance?

What is a depreciation clause on Gap insurance?

Of course this can be quite confusing if you buy a return to invoice policy, where you may justifiably expect to be protected back to the original invoice price if you buy the policy within the permitted time frame from the provider.  However, in effect your ‘return to invoice’ cover has turned into an Agreed Value policy with the addition of the depreciation clause.

The situation is even more confusing if the depreciation clause is included in a Vehicle Replacement policy. Of course this type of cover is supposed to convey a sense of protection over the potential increase cost of replacing the vehicle. however the countering effect of the depreciation clause you effectively wipe out all of the extra benefit you may expect.

Using our previous example in terms of a VRI policy, even if the equivalent replacement vehicle was to cost £1000 more than the original one, the deduction of £2000 from your settlement means that you could have been far better off even buying a return to invoice policy without such a punitive depreciation clause present.

We should stress very few products in the market still contain such a depreciation clause. Even if they do then the provider should make this clear to you as they have to express all significant exclusions as part of the sales process. With a term that could reduce your settlement but such a drastic amount, it would be hard to argue that it is not a significant exclusion for any Gap Insurance product.

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