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Feeling Excluded? What your Home Insurance Policy Won’t Cover

For most people, their main residence will be the biggest single purchase they ever make- years of booming prices in the UK mean that the average new mortgage approval now stands at over £150,000. In addition, consumer spending habits have been focussed largely on home improvements or items to be stored in the home; some insurers estimate the average UK household now contains £30,000-£40,000 of purchases. Clearly, such large investment needs to be insured from life’s misfortunes. Home insurance comes in two main flavours, building and contents.

“As an approximate guide,” says insurer Norwich Union, “if you were to turn your home upside down, everything that fell out would be your contents, and most of what remains would be buildings.”

Mortgage providers insist that you have building insurance so that in the event of a disaster the house can be repaired or rebuilt- lenders don’t want to be left without security for their loan. Contents insurance is more of an option, with more than 30% of single occupants currently not holding any at all, being fully exposed to any losses resulting from fire, theft or other damage. But even if you do hold a full home insurance package, not all losses will be covered. Although there is no ‘standard’ across the industry, similar exclusion clauses will be found in all household policies, limiting when and how much the insurance companies pay out.

War- What is it Good For?

OK, let’s make a gentle start with the worst case scenarios- war, terrorism, radioactive contamination and large-scale pollution. Basically, your insurance company won’t touch them with a bargepole- and who can blame them, given the potentially coffer-destroying magnitude of such events? If society does break down, it’s up to whatever form of government is left to house and compensate you and your family.

You are, of course, covered for acts of vandalism- and presumably it takes a little more than a few sectarian slogans spray-painted on your living room wall to qualify as an act of war or ‘terror’. I’ll leave it to Norwich Union’s jolly policy team to define their exclusions:

War, invasion, act of foreign enemy, hostilities or a warlike operation or operations (whether war be declared or not), civil war, rebellion, revolution, insurrection, civil commotion assuming the proportions of or amounting to an uprising, military or usurped power.

Feeling comfortable? Good, we’ll move onto next misfortune of biblical proportions- flooding.

Flooding- Not All Water Under the Bridge Yet

Before the 1960s, UK insurers did not cover flood risks in their household policies. Lurching from flood to flood, reliance was placed on Government disaster relief aid to compensate victims- a highly unsatisfactory arrangement in the long term. In 1961 an agreement was reached between the insurance industry and government: insurers would cover the risks, in return for flood defence works (such as the Thames barrier and other coastal works) being taxpayer-funded.

This agreement has come increasingly under strain over time. In the past few years the Association of British Insurers (ABI) has repeatedly complained on behalf of its members about what it sees as the relatively low amount being spent on defences, with the thinly-veiled threat of cover withdrawal always on the agenda. Uneasy short-term moratoriums were patched together between 2000 and 2005- ABI members agreeing to keep all homes covered at ‘reasonable’ premium levels, in return for pledges for defence project work to be stepped up.

Today, there are estimated to be around 6.5 million homes at risk from flooding, with concern being expressed about many new homes being built in high-risk areas (such as the Thames Gateway). However, although progress is slow, the number of homes successfully protected from flooding is increasing each year, with a further 80,000 added in 2006. Despite these results, the industry remains nervous of the task ahead and the lack of speed at which all these projects are being completed. Better technology now means they can assess flood risk down to street or even individual house level, leading to sharp premium rises for some- 60% or more not being uncommon. For the time being cover should always be available from at least some insurers, though choice may well be severely restricted for some in high-risk zones.

Excess and Costly Items

All claims made under a standard home insurance policy will carry an excess- i.e. an initial sum you need to pay for, the insurance cover paying out for anything above that amount. For most policies this will be £100-200, stopping a claim being made every time an ordinary vase get knocked off the shelf. Higher excess amounts can often be agreed to for a reduction in premium.

In addition, single expensive items (currently defined on most policies as those costing over £1500) may well be excluded from cover on a standard policy. If your insurer does agree to cover (perhaps for a higher premium), a full item listing with recent valuations may be requested. As for that original Picasso hanging in the living room, a specialist art and antique insurer would be your best option.

Under-Insurance and the Law of Averages

According to a recent survey, 90% of households in the UK were found to have under-insured their home's contents by at least £10,000. This means £250 billion pounds of uninsured household possessions nationwide. Keeping premium costs down may be a factor in this, although simple failure to take account of incremental household purchases over time is the more likely cause. But why worry? After all, the possibility of having to make a claim for the loss of all possessions in one go does seem very remote.

The problem comes when a claim is made and the insurer applies the policy’s average clause. The average clause states that the proportion of under-insurance is applied to each and every individual claim made by the insured. For example, if an individual take out insurance for only £30,000, when in fact £40,000 of contents are within the house (i.e. 75% coverage), then only £750 of a valid £1000 claim would be paid.

Accidents will Happen

Many household insurance policies cover accidental damage, often as a bolt-on for an additional premium. All policies however, exclude wilful damage.

On the face of it this seems sensible and obvious, although the dividing line between the two can often seem blurred- especially where youngsters are involved. In the recent case Patrick v. Royal London Mutual [2006], the insurance company had to pay out after the insured’s 11 year-old son made a bonfire inside a derelict out-building, only for it to spread and destroy non-derelict property nearby. The court held that the boy was unable to foresee the full consequences of his actions, making the damage caused accidental.

Teenage parties are highly claim-rich environments. According to research from Zurich Insurance, UK teens partied their way through £136 million of damage to their parents' homes in the five years to 2006, with 43% of all parties resulting in a claim. All this should be covered as accidental, though many may wonder at having to subsidise such parental laxity in their premiums.

Of course the kids don’t have a monopoly on poor judgement. Every year in the UK there are around 70 deaths and 250,000 serious injuries related to DIY work around the home. Accidental damage cover should hold for immediate physical damage done to property or contents (e.g. drilling through pipes), although longer-term consequential damage may be another matter. For example, Norwich Union’s household policy excludes from cover “Any damage or failure caused by… faulty workmanship including any attempted repair which does not meet industry standards.”

Home Alone

Leaving your home unoccupied for a long period of time (usually defined as 30-60 consecutive days) could spell trouble in the event of any household claim. Premiums are worked out based on the risks to fully occupied properties, so if long periods away are the norm, the insurer will need to be notified.

Home contents policies vary widely when it comes to items taken outside the home. This could be an issue for those regularly working away (though not holidays, which should be covered by travel insurance). Again, you get what you pay for, with some higher premium policies agreeing to cover all "contents temporarily removed" from the insured residence, even stretching to items taken to university by a son or daughter, provided they return to live back at home outside of term-time.

The most important thing to remember with all household insurance is that there is no standard policy. Levels of cover and exclusions can always be tuned to best fit for your needs. As ever, shop around or talk to your insurer for options available.

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