GAP insurance is an add-on motor insurance product that covers the “gap” between what a vehicle is worth at the time of a total loss (due to an accident or theft) and the amount that remains on the finance agreement. Developed as a means to protect car owners from the rapid depreciation of vehicle value, GAP insurance has become increasingly popular in the United Kingdom as car finance deals have become more widespread.
Recently, regulatory interventions have also influenced the GAP market. For instance, the Financial Conduct Authority (FCA) has scrutinized aspects of the market, leading to temporary suspensions and service improvements to ensure fair consumer outcomes. Despite these regulatory moves, the potential for fraudulent exploitation remains due to loopholes and the absence of a comprehensive database for GAP policies, which can make detecting multiple policies on the same vehicle particularly challenging.
- GAP insurance was “unfairly targeted” by the FCA this year (2024), with the way the market was shut down in February 2024 being “unheard of” according to Paul Fuller, managing director at GAP provider AMS Insurance, who felt the regulator’s actions last year were affecting growth in the motor insurance market.
For many consumers, the reason for purchasing GAP insurance is straightforward: when a new or nearly new vehicle is financed, an accident or theft can result in a payout that falls short of the outstanding finance amount. GAP insurance acts as a bridge by covering that gap, thereby alleviating the burden on the policyholder. However, the inherent design of GAP policies – centering on a simple calculation of the difference between two financial figures – can make them attractive to fraudsters who devise schemes to trigger a payout.
Fraud in the GAP insurance sector tends to revolve around exploiting the payout mechanism. Fraudsters often create scenarios that force a total loss situation where the payout is based not on the current market value but on the original invoice price of the vehicle. Two major schemes have emerged within this context:
- Return to Invoice (RTI) policies are designed so that in the event of a total loss, the insurer pays the policyholder the original invoice price of the vehicle rather than the depreciated market value.
This structure, while beneficial to honest customers, creates an attractive target for fraudsters. By manipulating the timing of the accident or staged events, perpetrators can trigger a situation near the end of the policy period where the gap between the current market value and the original price is substantial. As one analysis described, fraudsters may deliberately use their insured vehicle throughout the policy term and then cause the vehicle to be written off shortly before the policy expires, thereby claiming the full original invoice price as compensation. - Another prevalent scheme is the staging of accidents. Fraudsters deliberately cause or exaggerate damage to their vehicles in order to manufacture a total loss. These staged accidents often have certain red flags:
- The accident is deliberately timed near the end of the GAP policy period.
- The damage reported is inconsistent with a naturally occurring accident, sometimes involving cosmetic damage that is then digitally or physically exaggerated.
- Use of hire cars or third-party vehicles is common, as these vehicles are sometimes easier to manipulate and may be used to mask the true extent of the damage
- Case studies provide clear examples of such practices.
Fraud in GAP insurance is not simply a matter of isolated bad actors; it often involves elaborate schemes with multiple parties working in unison. The following mechanisms illustrate the complex, collaborative nature of GAP insurance fraud:
Fraudsters tend to time the fraudulent incident (be it an accident or reported theft) very close to the policy’s expiration, where the balance of unpaid finance is high relative to depreciation. This timing increases the gap amount between the current market value and the original invoice price, maximizing the payout.
Fraudulent schemes may be the result of collusion between several parties:
Policyholder and Accident Management Business: The policyholder may work with directors or employees of an accident management business to stage the accident.
Use of Hire Vehicles: The inclusion of hire vehicles in the accident is also a method to obscure the true nature of the event. Hire vehicles often lack proper historical data, and their involvement can be a clear red flag for fraud. They are easy and relativley cheap to source.
Exaggeration of Damage: After the staged incident, the damage may be exaggerated. Forensic engineering plays a crucial role in highlighting discrepancies between the reported damage and actual damage, revealing the fraudulent motive behind the claim.
One particularly vulnerable aspect of the GAP insurance market has been the lack of a centralised database for GAP policies. There is a concern that the absence of data sharing among GAP insurers could mean multiple policies can be taken out on the same vehicle without detection. This potentially opens the door for fraudsters to reap multiple payouts for a single incident, thereby significantly increasing their illicit gains.