In the event of your vehicle being declared a Total Loss (aka “written off”) as a result of an accident, fire or theft, your comprehensive Motor Insurance policy would normally only pay out the market value of the vehicle at the time of loss.
Now, imagine that you’d bought the vehicle brand new, two years ago for £20k and imagine that the current Market Value of the vehicle is only £10k. This would leave you £10k short of being able to buy the same (or nearest equivalent) vehicle, brand new today. But not only that, imagine that the brand new vehicle today is on sale for £2k more than you originally bought your car for.
In this scenario you’d have a “gap” of £12k – this being the difference between your motor insurance payout and the £22k cost of replacing the vehicle new-for-old today. Replacement GAP Insurance would aim to pay this £12K.