There are two main types of contents insurance: indemnity and new-for-old cover. It is important to know how to differentiate between both types, and how each type affects you.
Whether you are insuring the contents of your own home or a let property, consider how much it would cost to replace everything you own. Every home appliance, kitchenware item, designer handbag, children’s toy… The total monetary value may be in the thousands, tens of thousands, or even hundreds of thousands. It’s easy to undervalue how much you actually own, when you glance around the room and simply see the wardrobe or the kitchen cabinets, but not all the things that may occupy them. In fact, an estimated 1 in 4 homes in the UK are under-insured!
What is New-For-Old Contents Insurance?
New-for-old contents insurance, also known as “reinstatement insurance”, is a like-for-like replacement or full compensation of insured items. For example, an old TV will be replaced with a brand new TV of similar specification – “new” as in condition, not necessarily of model. This means that even if that item is no longer on the market, you’ll receive enough to purchase the modern equivalent or a similar item of equal value. However, this shouldn’t be confused with getting a newer model in terms of specification. Your smartphone may have been the top-of-the-range flagship device of 2015, but this doesn’t mean that it can be replaced with this year’s flagship phone. If your exact 2015 model is no longer available, a comparable device will be paid for.
This is becoming the most common type of contents cover on a home insurance policy and, despite being more costly, can yield a better financial outcome for the insured in the event of fire, flood, theft, or storm damage.
What is Contents Indemnity Insurance?
Contents indemnity insurance reimburses the current value of the insured item —taking into account age, condition, depreciation, and obsolescence— unlike new-for-old which is based on original value at the time of purchase. Insurance on an indemnity basis is also known as “wear and tear cover”, as it covers the cost of repair for damage.
For example, if you bought a laptop five years ago for £500, you won’t be compensated with £500 to replace it. Instead, you will receive the amount that it is valued at today – which, considering the rate at which newer technology is being released, could be significantly less. In other words, your insurer is paying for a five-year-old laptop. The current market value for your five-year-old laptop could be around £200 today. This means that you will have to purchase an outdated or second-hand replacement worth £200, or pay the difference yourself for the newer, upgraded model.
Indemnity cover often has the advantage of a cheaper premium as you aren’t compensated for the full cost of the damaged, lost, or stolen item.
What are the differences and similarities?
Put simply, new-for-old pays for the cost to replace the insured items with a brand new equivalent. Indemnity cover pays for the cost of what the insured items are currently worth after “wear and tear” – or what they would be worth secondhand.
Both indemnity and new-for-old contents insurance will have an excess to pay, meaning that in the event of a claim you will have to pay an amount toward it yourself. This is to filter out low value claims, deterring those from claiming when it isn’t necessary. The mandatory excess may stand at a set amount – such as £50, £100, or £200.
When you take out contents insurance, it is usually offered as:
- Sum insured
- Unlimited sum insured
- Bedroom rated
With “sum insured”, you calculate how much cover you need based on the value of your contents. Whereas, with “unlimited sum insured”, all contents are insured limitlessly, minimising the risk of being under-insured. “Bedroom rated”, on the other hand, is different in that the sum insured is based on the number of bedrooms in your home.
Policies don’t typically cover items with short lifespans, such as clothing. These types of items may only be covered on an indemnity basis. Ensure that you read the wording carefully so that you are completely aware of what exactly is and isn’t covered in the policy.
My entire contents of my home have been destroyed due to contamination from a sewage flood caused by lack of maintenance by my landlord do I claim off their buildings insurance or public liability?
If you have suffered a loss due to your landlord’s negligence then you need to make a claim against the landlord. If they have given you their insurance details you may be able to speak to them directly depending on the circumstances. Your landlord may be covered by their property owner’s liability insurance but whether cover exists or not does not affect your position of making a claim against your landlord. You should seek legal advice on how to proceed or speak to your own contents insurer, if you have such cover, to see if they can offer any assistance.