New for old or indemnity cover on contents

Most home contents policies in the UK are written on a new for old basis. If your sofa is destroyed by a fire or your television is stolen, the insurer either pays the full cost of repairing the item or pays to replace it with a new one, rather than paying what the old one was worth on the second-hand market¹.

The exception most people meet is clothing and household linen. Insurers commonly settle those on an indemnity basis, which means a deduction for wear, tear and loss of value based on the age of the item². One insurer states plainly that "Linen and clothing are not covered on a new-for-old basis"², and another says most contents are covered new for old "except for clothing and household linen where deductions for wear and tear may apply"³.

The difference matters most on a large claim. A new for old policy replaces a ten-year-old washing machine with a new one; an indemnity policy pays what a ten-year-old machine was worth. Indemnity policies deduct an amount for wear, tear and depreciation and are described in one insurance guide as offering savings but not generally recommended, because you may be much worse off in the event of a large claim¹.

What new for old and indemnity cover mean

Home insurance splits into cover for the building itself and cover for the contents inside your home⁶. Contents cover is the part that deals with your belongings, and the basis on which it pays is set out in the policy wording.

New for old means the insurer puts you back in the position of owning the item, not the position of owning its depreciated value. Most policies work this way: the insurer either pays the full cost of repairing damaged items, or pays to replace them with new items if they are damaged beyond repair or stolen, except for items such as clothes¹. NFU Mutual, for example, lists "Replacement of your contents new for old, if they're damaged beyond repair" among its cover features⁷.

Indemnity means the insurer pays what the item was worth at the time of the loss, after wear and tear. The principle is the same one the Financial Ombudsman Service applies to vehicles: the insurer will usually pay out market value, meaning the amount the vehicle would have been worth just before it was stolen or damaged⁸. Travel policies use the same idea for baggage, where what is paid is based on the value of the items when they were lost or damaged, with a deduction for wear, tear and loss of value based on the age of the property⁹.

The word indemnity also appears in a completely different context that catches people out. Mortgage indemnity insurance protects the lender, not you, and if it pays out after a repossession the borrower remains responsible for the money and can be asked to pay it back¹. New-build structural warranties are also described as policies of indemnity that do not cover legal liabilities to third parties¹⁰. Neither has anything to do with how your contents claim is settled.

Indemnity pays what the item was worth, after wear and tear

On an indemnity settlement, the starting point is the item's value just before the loss, not its replacement price. The insurer then deducts for age and condition. A travel policy from Chase Protect sets out the method in its own terms: "What we pay is based on the value of the items when they were lost or damaged. A deduction will be made for wear, tear and loss of value based on the age of the property"⁹.

The same logic runs through other insurance lines. For mobile phone and gadget cover, a cash settlement will generally be the cost of replacing the phone or gadget with one of the same age and condition before the insured event, from a reputable source¹². For a written-off car, the ombudsman's position is that money should usually only be paid to the amount a like-for-like replacement would have cost your insurer⁸.

The practical effect is that indemnity cover leaves a gap the policyholder fills. If a five-year-old laptop is destroyed, an indemnity policy pays what a five-year-old laptop of that model was worth, and the difference between that and a new one comes out of your own pocket. On a single small item the gap may be modest. Across the whole contents of a home after a fire or flood, it can be substantial, which is why the guide quoted above describes indemnity-only contents policies as offering savings but not generally recommended¹.

Wear and tear is also excluded in its own right, separately from the settlement basis. Insurers exclude general wear and tear, things breaking down or becoming faulty, and claims for items broken due to age¹³. HSBC lists "Contents wear and tear" among its exclusions and says it will reduce the amount paid for clothes or household linen to reflect wear and tear¹⁵. So even on a new for old policy, an item that simply wore out was never covered in the first place.

Clothing, linen and other exceptions to new for old

Clothing and household linen are the standard carve-out. Ecclesiastical states that "Linen and clothing are not covered on a new-for-old basis"², and Zurich says most items of contents are covered on a new for old basis "except for clothing and household linen where deductions for wear and tear may apply"³. HSBC's wording goes further and says it will reduce the amount paid for clothes or household linen, giving bedding as an example, to reflect wear and tear¹⁵.

Other limits sit alongside the settlement basis rather than replacing it:

• Wear and tear and mechanical breakdown. Excluded across contents and buildings cover².
• Items left outside. Cover for contents in the open, such as garden furniture, varies by policy, and some policies include garden furniture, trees, hedges, lawns and fences while others do not¹⁶. Protecting contents left outside within the boundaries of your home needs contents in the open cover, which a good policy will usually include as standard¹⁷.
• Unattended bicycles. Ecclesiastical excludes bicycles used for racing, and bicycles away from home that are stolen when not secured to a permanent object².
• Motorised vehicles and craft. Motorised vehicles, aircraft, boats, boards and other craft, and any parts, spares or accessories, are excluded from HSBC contents cover¹⁵.
• Damage by domestic animals. Loss or damage caused by domestic animals is excluded¹⁵.
• Homes left empty. Damage that happens after the home has been left unoccupied for longer than the period shown in the policy is excluded¹⁵.

Buildings policies carry their own list, including general wear and tear, things breaking down or becoming faulty, deliberate damage by you or your family, theft by a guest invited into your home, and road vehicles and mobility scooters¹³. Many policies also do not cover damage to parts of the property other than the main residence, such as patios, paths and terraces, unless the main residence is also affected⁴.

How each type of cover affects your premium

Indemnity cover costs less than new for old because the insurer's exposure is smaller: it pays depreciated value rather than replacement price. The guide that describes indemnity policies as offering savings does not put a figure on the difference, and no standard published gap exists, so the saving depends on the policy and the contents insured¹.

What is measured is the gap between what loyal customers and new customers pay. On average, people who had been with their insurer for more than a year paid £75 more than new customers for combined home insurance policies, according to a 2023 consultation¹⁸. That practice has since been restricted: since 1 January 2022, when you are sent a renewal quote, your home or motor insurance company has to offer you the same deal as a new customer¹⁹, and insurers must offer existing customers wanting to renew a price no higher than they would pay as a new customer through the same sales channel⁵.

Those rules do not stop an insurer offering a cheaper price if you haggle²⁰. Other factors move the premium in ways that have nothing to do with the settlement basis. New build homes can be cheaper to insure because they often have more secure windows and doors and more up to date electrics¹³. Some companies offer cheaper policies for older people, who may be considered lower risk¹⁹. And making a claim can increase your home insurance premium when you renew next time⁹.

Working out how much contents cover you need

The sum insured is the figure you choose for the total value of your contents, and it is the number the insurer uses to work out both your premium and, if things go wrong, how much of a claim it pays. Getting it right is the single most important thing a policyholder does.

The benchmark used in official retirement living standards gives a sense of scale: the moderate and comfortable standards include building and contents insurance with £80,000 cover for contents, accidental damage, emergency cover, replacement locks, and £2,000 personal possessions cover²¹. That is a standard of living measure, not a recommended sum insured, and the right figure for any household depends on what is actually in it.

A workable approach is to go room by room and price what it would cost to replace each item new, since that is what a new for old policy will pay. Include clothing, linen, kitchen equipment, electronics, furniture, tools, and anything in a shed, garage or loft. Then add the items that need separate treatment:

• Items away from home. Personal possessions cover is a separate extension for belongings taken outside the home²¹.
• Items in the open. Garden furniture and similar items need contents in the open cover¹⁷.
• High-value single items. Policies commonly set a single-item limit, above which an item must be listed separately.

Renters need contents cover too, and the same calculation applies. A tenancy does not come with contents insurance, and the landlord's buildings policy covers the structure, not your belongings¹⁴.

When the insurer can pay less: underinsurance and the average clause

If you insure your contents for less than their replacement value, you are underinsured, and the insurer can apply the average clause. The ombudsman sets out how it works: if the sum insured is £300,000 but should have been £500,000, the insurer will pay 60% of the claim value⁴. In a worked example, if the rebuild cost of your home is £400,000 but you valued it at £200,000, you are 50% underinsured, and some insurers would only pay 50% of a claim, with the consumer paying the rest⁶.

The industry definition is the same: a clause in insurance policies whereby, in the event of under-insurance, the claim paid out by the insurer is restricted to the same proportion of the loss as the sum insured bears to the total value of the insured item²³. The effect is that you pay a proportion of any loss or damage if you have insured something for less than its replacement value, and the insurer has a formula for working this out⁶.

The ombudsman will usually say it is not fair to apply the average clause if the insurer did not ask for the full replacement or rebuild cost, or if there is no average clause in the policy⁶. Where the insurer would still have insured the customer but at a higher premium, the ombudsman is likely to find the insurer can reduce the claim in line with the proportion of the premium paid: if they paid £400 but should have paid £500, they receive 80% of the claim value²⁴. Where the insurer would not have insured the customer at all, the ombudsman is likely to find it fair for the insurer to reduce or decline the claim, and the insurer may also void the policy²⁴. Where the insurer would still have insured the customer at the same premium, the ombudsman is unlikely to find it fair for the insurer to reduce or decline the claim²⁴.

The law sits behind this. Under the Consumer Insurance (Disclosure and Representations) Act 2012, where a consumer makes a careless misrepresentation and the insurer would have charged a higher premium, the insurer may reduce proportionately the amount to be paid on a claim²⁵. The ombudsman also looks at how the terms were made clear to the customer, including that underinsurance would put them in a worse position than the redress allowed under the Insurance Act 2015²⁴.

Checking your policy and making a claim

The settlement basis is stated in the contents section of the policy wording and in the schedule. Look for the words new for old, replacement, or indemnity, and for any list of items excluded from new for old settlement. If the wording is unclear, ask the insurer in writing before you need to claim.

When a claim happens, the insurer chooses how to settle it. Home insurance claims can be settled by repairing the damage, replacing something lost or damaged, or paying cash to cover the cost of repair or replacement⁶. Policies often say so explicitly, in terms such as: "We will decide whether to repair, replace, pay cash or reinstate the damaged part of the building"⁶. AA Home Insurance sets out the same choice at the insurer's option: pay the cost of repair, replace the item as new, or pay the cost of replacing the item as new, with cash settlements capped at the discounted replacement price where a preferred supplier is available²⁷. Lloyds Bank says that where possible it will try to repair the damage, and if it cannot, it will try to replace or pay a cash settlement instead⁹.

If you want money rather than a replacement, expect the figure to be based on what a like-for-like replacement would have cost the insurer, not on a retail price you have found⁸. For phones and gadgets, most policies provide refurbished replacements rather than a new device, and the ombudsman looks at whether that was made clear in the policy¹².

A few practical steps reduce the risk of a dispute:

1. Check that your insurance is still current and paid up to date²⁸.
2. Keep property maintenance up to date, because if you have been negligent the insurer may query the claim²⁸.
3. Speak to your insurer before carrying out significant clean-up or repair work, unless immediate action is needed to protect people or prevent further damage²⁹.
4. Keep receipts, photographs and valuations for higher-value items.
5. Answer every question the insurer asks honestly and completely, because failing to do so could invalidate the policy and mean claims are not paid³⁰.

If you disagree with how a claim was valued, complain to the insurer first. If you are still unhappy, the Financial Ombudsman Service can look at it, and it will consider whether the insurer's questions or guidance about the sums insured were clear²⁴. Complaints about misleading information at renewal have been considered by the ombudsman, and not every complaint succeeds: in one case study about misleading information provided during a policy renewal, the complaint was not upheld³¹. Free, impartial help is available from MoneyHelper and from Citizens Advice if you want to understand your options before you complain.