What is contents insurance and what does it cover? Here's what you need to know
Contents insurance sounds simple enough, but it often causes some confusion.
And there is a trap for the unwary … so read on!
When you compare home insurance quotes, you will generally be looking for contents and buildings insurance.
If you live in a leasehold flat, or you rent, then you may not need buildings cover.
Either way, you need to be clear about contents insurance is and what contents insurance actually covers.
What is contents insurance?
Contents insurance covers the financial cost of repairing or replacing the possessions in your home. This includes such items as furniture, curtains, TVs, computers and electrical appliances as well as clothes.
It’s important to ensure any policy you’re considering offers cover for any specific items you want insurance cover for.
Beyond that, though, there are usually many other options you may want to consider.
Do you need accidental damage cover?
A contents insurance policy covers your possessions from theft or damage from a fire or flooding.
But what if someone spills red wine over your new cream carpet and ruins it?
To claim for that, you would need accidental cover, which will cost more, but offers peace of mind.
Most policies will require you to list specific items over a certain value separately.
So, don’t assume that a valuable painting or watch, for example, are covered. Check what the policy covers in terms of maximum for each item.
In general, it's a good idea to keep a record of any and all items that could be considered ‘expensive’, over £1,000 would be a good benchmark. But check the small print of the policy, or ask the provider.
What is ‘contents’?
This might sound like a silly question. But, ask yourself, are fitted kitchen units contents?
The old insurance underwriter trick is this: imagine turning your house upside down. Whatever stays in place if buildings and whatever moves or falls to the floor is contents.
What types of contents insurance are there?
There are two types of policy.
One is called indemnity.
If you have this kind of policy, and you claim, the insurer will take into account how old an item is and how much wear and tear it’s been subjected to.
So, it the item is old and damaged beyond repair, you’re unlikely to be able to replace it after making a claim.
New for old is the other kind of policy and is much more common. This does what it suggests and pays out the cost of replacing an item with a new equivalent.
Obviously, the difference between the two will be reflected in the price of each kind of policy – new for old will be more expensive that indemnity policies.
Do you have to buy contents insurance?
Unlike buildings insurance, which is required by a mortgage lender, there is no requirement to buy contents insurance
Other options with contents insurance
When you compare insurance quotes, it’s important to make sure you compare like with like.
If you’re only comparing base-level polices when you need optional extras, you’re not going to get an accurate comparison.
There are a number of optional extras you may want to consider.
Accidental damage cover
This is what it says. Accidentally damage an item and it will be covered. Check for inclusions and if you're uncertain, ask. If you drop your brand new iPhone X in the loo, is that covered …for example?
This will cover you if you need to get a tradesperson out in a hurry, if a pipe bursts, for example. Without emergency cover, getting help at short notice can be very expensive.
Again, another option that offers peace of mind. These days, when legal action for compensation has become much more common, legal expenses cover can prove a worthwhile investment. You’ll normally be covered if you have a case to takes someone to court for poor work on your house, for example.
Perhaps more importantly, if someone decides to sue you because they have an accident at your house, you will be financially protected.
Beware of underinsuring
If you go through your home and itemise every possession, you may be amazed when you calculate how much it would cost to replace everything.
It may be tempting to cut down this figure when you’re comparing contents insurance quotes in order to save money on the premium.
You will generally find that the less you insure the contents for, the lower will be the premium.
What is underinsurance?
As its name suggests, under-insurance is when you insure for less than the value of the replacement of your contents.
This can have an impact, even when you make a small claim.
If you insure your contents for £10,000 when the cost of replacement would actually be £20,000, you have under insured.
Some people imagine this is fine and they’d be happy to get only half the cost of replacing their contents in the event of a claim. Meanwhile, it keeps the premium down.
Under-insurance such as this can allow an insurer to apply what is known in the industry as ‘averaging’.
This means that if you insure your total loss for, say, 20% less than it’s true worth, ANY claim you make could be paid out with 20% taken off.
This catches a lot of people out.
If you insure ALL your contents at a total replacement value of £30,000 and the insurer decides it should have been £40,000, and you later make a claim for £200 on an item, they may only pay out £150.
They can lower the proportion they pay out be the same proportion you are underinsure.
What to look out for …
It’s therefore vital to be careful when you answer questions on an insurance application form.
This is because, in the event of a dispute, the wording of questions and how you answer is really going to matter to the financial ombudsman.
Average clauses - where the small print says the insurer will apply averaging in the event on under-insurance – are very common in home insurance policies.
However, it’s not unheard of for insurers to try and apply averaging even when this isn’t mentioned in a policy.
If that happens, then you’d probably win any dispute.
When applying for contents insurance, you’re likely to be asked questions such as:
“What is the total value of contents held at your property?” Or “How much cover do you require?” or, “What sum insured do you require?”
These can be answered in different ways.
One is asking about the total value of items in the property, while the other two are asking what amount you want to insure.
Look out for the 'total value' question
For an insurer to apply averaging (even if they do have a clause in their policy about it), they would have to ask about ‘total value’ in this question, the ombudsman says.
Here’s what it says on the matter in full: “If an insurer did not ask the consumer to state the replacement cost of their entire contents, we are unlikely to agree that it is fair to apply the average clause on the basis that the consumer did not disclose this amount.
“Neither would we think it fair for the insurer to use either misrepresentation or non-disclosure as a reason to avoid the policy or reduce the claim payment.”
The best policy, though, is to make sure you make a fair and accurate assessment of the value of your total contents.
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