After a burglary, the second shock is often the insurance settlement: what will be replaced, with what, and whether cash or a voucher is offered instead. The Financial Ombudsman Service publishes guidance for insurers, and a page for consumers, on how it looks at complaints about settling home insurance claims. This article summarises two of those pages, “Settling home insurance claims” (guidance for businesses) and “Home and buildings insurance” (for consumers). The Ombudsman says it follows the Financial Conduct Authority’s Dispute Resolution Rules and looks at the policy, relevant law, regulator guidance and good industry practice. It is describing how it approaches complaints, not creating rules for every claim, and the policy wording always matters. This is general information, not insurance or legal advice.
The starting point: indemnity
The Ombudsman says buildings and contents policies are generally policies of indemnity: they aim to put the policyholder back in the position they were in just before the loss or damage. Where a claim is accepted, the insurer decides how to settle it: by repairing, replacing, or paying cash for the cost of repair or replacement. The guidance says that policy terms usually let the insurer choose, but it expects the insurer to consider the specific circumstances of each customer and what is reasonable for them. It also says a reasonable settlement puts the customer into a broadly similar position to before, not necessarily an identical one.
Contents or buildings?
The consumer page explains that contents insurance covers possessions such as a TV, jewellery, furniture or clothes, in other words, items taken along when moving house, while buildings insurance covers the structure and permanent fixtures such as baths or fitted kitchens. It says buildings policies usually include outbuildings such as garages and sheds, but that the policy should be checked. The Ombudsman treats fitted carpets as contents because they are transportable, regards items such as fitted wardrobes, fitted kitchens and built-in appliances as buildings, and says free-standing furniture and appliances are contents. The guidance for insurers notes that replacement usually applies to contents claims because buildings are repaired, though sometimes part of a building is replaced, for example a front door that has been smashed in.
Replacement: exact match, reasonable match, new for old
- Exact match. The Ombudsman expects an insurer that settles by replacement to provide an item that is the same as the lost one, ideally an exact match. If that is impossible, for example because the item is no longer made, it says a compromise is needed.
- Reasonable match. Where an exact match cannot be found, it thinks the fairest solution is the closest equivalent that is broadly as good or better. It does not expect insurers to exhaust every option, and does not expect customers to accept something inferior. What is reasonable depends on what matters to the customer and what is available to the insurer.
- New for old. The guidance says most policies replace damaged items “new for old”, so a customer claiming for a ten-year-old item would be entitled to a new one.
Sets that no longer match
Where a stolen or damaged item is part of a matching set, the Ombudsman says most policies limit the insurer to the damaged item only. If a customer suffers a “loss of match”, it says it has often found fair compensation to be 50% of the cost of replacing the undamaged parts, though this depends on the circumstances, such as how much of the set is affected and how prominent the mismatch would be. It usually thinks compensation should be paid in cash.
Cash settlements
An insurer can settle with cash whether or not an item can be repaired or replaced, and the Ombudsman says the amount should reflect the cost to the customer of getting a repair done or replacing the item, and be enough to put them back in their earlier position. If a customer insists on cash when the insurer had offered a fair repair or replacement, the insurer may pay only what it would have cost the insurer to do that, which may be less than the customer would pay. The Ombudsman says that is fair only if the original offer was itself fair.
On VAT, it says it usually thinks it fair for an insurer not to include VAT in a cash settlement, on the basis that the customer may spend the money differently, but that insurers would usually be expected to pay VAT added to insured work once the customer has shown they paid it. Where the customer has a clear plan, such as a detailed estimate from a contractor that certainly charges VAT, it is likely to say VAT should be included.
Vouchers
The Ombudsman says an insurer may offer a voucher instead of cash, usable only with certain companies. The voucher must be for enough to buy a reasonably matched replacement, and the companies must be able to provide one. If not, it is not a fair settlement. It notes that vouchers are often used in jewellery claims, that insurers use them because they get a discount from the supplier, and that a customer who wants cash may receive only the insurer’s cost of the voucher, which can be much less than its face value.
Common questions
Where does security equipment fit?
Whether an item is contents or buildings follows the fixed-versus-removable test above. The site’s guide to telling your insurer about locks and alarms covers what to disclose at the start of a policy.
The bottom line
The Financial Ombudsman Service treats home insurance as indemnity: a fair settlement puts a burgled household back in a broadly similar position, through repair, replacement, cash or a voucher that buys a reasonable match. Its guidance on exact matches, matching sets, VAT and vouchers explains the points that most often cause disputes. The wording of the individual policy still sets the limits, so it is sensible to read the settlement terms before accepting an offer.