Buying Gap insurance? Read this first

Don’t buy add-on insurance when you purchase a car, a trip or a phone

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Insurance is being sold to people who may not be able to claim it, by people who are unqualified to sell it and who, in turn, earn commission rates of up to 71 per cent.

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That is my summary of a shocking report by the regulator, the Financial Conduct Authority (FCA).

To be clear, this report was not about mainstream insurance for your car or your house. Rather, it looked at add-on insurance that is sold when you buy a retail product such as a phone, a trip or a car.

For example, if you buy a car from a dealership, you may also be sold what’s known as Gap insurance. That stands for Guaranteed Asset Protection and it’s supposed to kick in if your car is written off or stolen within a year or two of you buying it. Your regular car  cover would only give you the used market value at the time of the loss.

Gap insurance is meant to make up the difference to the price of a new car. However, the report reveals that the dealership that sells  it to you earns massive commission. In one example it gave, a dealership charged the customer £300, plus Insurance Premium Tax of £60. The actual insurance only cost £87, including the distributor’s commission.

That left the dealership with £213 commission for itself – 71 per cent of the pre-tax cost.

It also found it was sometimes sold with second-hand cars where there is no gap to cover.

The supreme Court decided in 2014 that undisclosed commissions of around 70 per cent on Payment Protection Insurance were excessive, and the FCA then ruled that undisclosed commission of more than 50 per cent constitutes mis-selling.

As yet, the FCA has not extended this to other forms of insurance, although it did recently fine Carphone Warehouse more than £29 million for mis-selling a technical support and insurance product with mobile phones.

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So if you’ve bought Gap insurance at the time you were sold a car,a trip or any retail product, you  should consider if it was properly sold at a fair price. If not, then complain and ask for your money back. If that fails, appeal to the Financial Ombudsman Service.