Gap Insurance for Lease or Contract Hire

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Should Gap Insurance be purchased if a car is acquired under a Contract Hire or Lease agreement?

A lease or contract hire agreement is substantially more than other forms of car finance, if a car under such agreement was written off, the motorist is still completely liable to pay the lease of the car, despite it no longer being used. Without gap insurance the funds would have to be found to pay off the outstanding agreement while at the same time potentially paying for a new car.

The leasing company would make calculations to determine a Contract Hire or Lease settlement in the case of a leased vehicle being written off due to accident or theft.
Say for example a vehicle costs £18,000 before VAT with a monthly rental of £300.00 plus VAT over a three year agreement.

If the leased vehicle was written off after 18 months, leaving thirty six months outstanding on the lease a total of £10,800 in addition to this the leasing company may have aimed to sell the car at the end of the lease for a minimum of 35 percent of the purchase price £6,300 the total outstanding cost of the agreement would be £17,100. The insurance policy for the car may for example pay out £12,000 leaving the motorist with a shortfall of £5,100 without taking into consideration a deposit for a new lease or any VAT.

These calculations demonstrate the necessity for gap insurance if sever debt is to be avoided.