When it comes to home insurance, it is sometimes difficult to persuade a customer that they need to insure both their buildings and contents for their maximum replacement cost. Why so is often the question. I'm never going to claim that amount of money, the house isn't going to burn down and if I'm burgled, thieves are never going to steal all of my contents. Fair question? What people are referring to here is the perhaps the possibility of taking out something akin to a partial policy that would only pay some of the loss. Such a contract is referred to as a first loss policy There have been instances of these in the past for home insurance policies but for the bulk of UK homeowners, they are not available.
The first loss policy is basically an agreement between the policyholder and the insurer that only claims up to a certain level will be met. Say £20,000 or £40,000. First loss policies can be considered where the insured party believes that the degree of probability of a total loss taking place is very unlikely or basically impossible. The average clause does not apply and in the event of a loss, the insurer will pay up to the amount chosen, above that and the policyholder has to fund the loss out of his or her own pocket.
The market for these covers is small. Basically must people are unaware of their existence. In any event, for buildings insurance, if you have a mortgage on the property, the lender would not allow you to enter in to such a deal, mortgage documents normally state that you should effect buildings insurance for the course of the loan for a sum insured of not less than the full rebuilding cost. Having funded the cost of the property, lenders do realise that on their mortgage book there is a chance they are going to suffer some total losses and there is no way they are going to allow people to borrow money on a property which is not fully protected by insurance.
With regard to contents insurance, these polices in the main are written on a "new for old" basis and to receive the full benefit of cover,you are told at the quote stage that you need to insure your belongings for their full replacement value, failure to do so could result in you receiving a deduction from any claims settlement. Can you obtain a first loss policy for contents insurance? It's extremely unlikely if you are a normal policyholder.
A form of self insurance often employed to obtain a cheaper home insurance quote, is the "excess". These are both compulsory (you don't have a choice) and a voluntary excess where you can choose an additional amount you are willing to pay. You are thus considered to be self insuring for the first portion of the loss. If you have a total excess of £200.00 and you enter a claim of £1000. The net result is you will receive £800.00.
Another form of deduction similar to a policy excess but little used, is known as a franchise. A franchise of say £250.00 is like an excess in that the policyholder pays all losses under the franchise amount. But if the claim exceeds the franchise amount then the insurance company pays the entire claim without deduction. Franchises arrangements are not common on property insurance policies.