Most of us assume that, if we need to make a claim on our home insurance policy, our insurance company will pay out enough for us to replace the damaged, destroyed or stolen items.
In most instances, this is how contents insurance operates. Your possessions are likely to be insured on a 'new for old' basis, which means that, even if an item which has been damaged is very old, it will be replaced with a new one. But this is not always the case.
Depending on what the item is, you may only be offered the cost of repairing the damage, or your policy might only cover losses due to wear and tear. This means that, while you will receive a pay-out to replace or repair the damaged items, a reduction will be made for the effect of wear and tear and to take account of the fact that the item itself might have depreciated in value.
Different insurers adopt different approaches, so it makes sense, therefore, to read the small print of your policy carefully, so you understand exactly what kind of cover you have.
You may be able to specify whether you want new for old cover, or cover which will only pay out for wear and tear. The latter would mean you paid a lower premium but received less in the event of a claim.
Advantages of new for old cover
New for old home insurance gives you peace of mind that if an item is damaged beyond repair the insurer will pay out to replace it in full. Even if the exact item is no longer available, you should still receive enough for you to buy a new, similar item.
However, if you opt for 'indemnity cover', otherwise known as wear and tear cover, then rather than the insurer paying out for you to purchase a replacement item, they are instead compensating you for the loss of your item.
New for old home insurance gives you peace of mind that if an item is damaged beyond repair the insurer will pay out to replace it in full
This means that the insurance company will provide you with what you had before – they'll restore you to the previous position. That means if you claim for a dishwasher that is four years old, you will be given a replacement dishwasher that if four years old.
Similarly, if you bought a laptop a few years ago for £400, but that model is no longer available, that is the sum you would get from the insurer, even if it would cost you much more than that to replace it with a new one.
On the plus side, however, premiums for indemnity cover tend to be cheaper than for new for old cover, as insurers often don't have to meet the full cost of replacing items if they are stolen or destroyed.
Remember that, regardless of whether you go for new for old or indemnity cover, there will usually be an excess to pay in the event of a claim. The excess is the portion of any claim which you must pay yourself.
Most policies have two types of excess. The mandatory excess has to be paid following a claim and will usually stand at around £50 or £100 for each of your contents and your buildings policy (although you might also have a separate subsidence excess of £1,000 or even £5,000 if you live in a high risk area).
The mandatory excess is included in policies to weed out low value claims that are costly to administer and which would push up premiums.
The second type of excess is 'voluntary'. You don't have to include a voluntary excess (hence the name) but, if you do, the insurer will lower the premium on the basis that it would have to pay out less in the event of a claim.
The higher the voluntary excess, the bigger the reduction in premium, although there will be a limit on the excess you can set. And when you make your choice of excess, remember that you will be expected to stump up precisely this amount before the insurer will pay its share of the claim – so it has to be an affordable and realistic amount.
Which items aren't usually covered by new for old cover?
While most items will be covered by new for old cover, things such as clothing and bedding won't be included, as these tend to be less durable and have a shorter 'life span' than items such as furniture or electrical items.
Even if you have new for old cover in place, always read the small print and check for any exclusions. Making an insurance claim is usually distressing enough without discovering that you didn't have sufficient cover in place to replace any items that have been destroyed or damaged.
You should also be realistic about how much it would cost you to replace the contents of your home if you were hit by a flood or fire, for example. Although it might be tempting to go for indemnity cover as it costs less, remember that you might not be able to replace all the items you need, which you would be able to do if you had new for old cover in place.