Cover that is daylight robbery

Insurance: in the third part of our series, we show how to get good-value policies for home contents

As alarming examples of wishful thinking go, it takes some beating: one in 20 people believe that there is less chance of being burgled than of winning the National Lottery, according to research published by NatWest Insurance Services.

Sadly, the statistics do not back up this view of life. While the odds against scooping the Lottery are 14 million to one, there is roughly a one in 34 chance that your home will be burgled next year. That adds up to more than 630,000 homes burgled in the year up to June 1996, according to Home Office figures.

Damage can be financial and emotional. Around one in four of all homes do not have any house contents insurance. For rented accommodation the number without insurance rises to more than 40 per cent.

You also risk losing almost everything you own if, for example, your home is gutted.

The most obvious reason to run this risk is cost; the average contents policy premium is pounds 120 a year. If you are young and live in a high-risk area, the premium could be two to three times this.

But these costs are much higher than they need be. Savings of, typically, a quarter off the average premium for contents insurance are on offer if people shop around, says AA Insurance, which surveys premiums each quarter. Much of the blame for this overpricing lies at the door of the mortgage lenders who control around a quarter of the market. Banks and building societies often put pressure on people to buy house insurance from them when they take out a mortgage. Indeed, some apparently cheap loans are only available if you also buy house insurance from the lender.

The lenders then rely on inertia - around four out of five people automatically renew their policy with the same insurer, according to research published last month by Direct Line, the phone insurance firm. This can be dangerous. For a start, if you do not check your policy there is the risk that the amount of cover you have is wrong. Most contents policies offer a maximum sum insured, the most you would ever get paid under the policy, although some offer a set amount of cover depending on how many bedrooms your home has.

If the amount of cover you have is too high you are almost certainly paying too much. But there is also a real risk that the cover is too low, particularly if you opt for a cheap policy.

If the contents of your home are worth a lot more than the maximum cover on the policy the insurer may scale down any claim you make, even if the claim is for a relatively small amount. It is also easy to get hit by limits on the most you can claim for any one item.

So anyone who owns valuable works of art, antiques or jewellery will usually get the best deal by using a specialist insurer (see the report on page 19).

But even if your possessions would look more at home in a car boot sale than a London auction house, you can still benefit by thinking about the cover you want. The points to watch for are:

How much will the insurer pay? Most policies offer indemnity cover - the insurer will deduct money for "wear and tear" when they pay your claim. If you want to be insured for replacement value you will have to pay a higher premium.

Are you covered for accidental damage? Some standard policies will pay out if you ruin your stereo or computer by pouring coffee over it, others will not. If you want accidental damage cover for all your possessions you will have to pay a higher premium. Conversely, if you are happy to waive the right to any accidental damage cover, many insurers will offer you a discount.

Are you covered outside your home? Many policies will offer you limited cover for the theft or loss of possessions while, for example, you are on holiday. If you want cover for a high-value item, such as a camera, you may well need to pay for an "all-risks extension".

What are the exclusions? Check the small print carefully. If, for example, you have got a matching set of furniture, such as a three-piece suite, many policies will only pay for the damaged or stolen item, not for a new set. Similarly, insurers will increasingly only replace goods, rather than paying cash compensation. Watch out, too, if you let or sub-let your house; you are usually covered for theft only if there is evidence of forced entry.

What are the security requirements? If you live in a high-risk area you may well be unable to get any insurance unless you have window locks and mortice locks on external doors.

Once you have decided on the cover, the next step is to try to cut the premium. Fortunately, this is relatively easy for most people, particularly if you live in a high-risk area. For example, a survey of 23 direct insurers and three brokers published last week by Insurance Advice, an insurance quotation service in London, found that premiums for a contents policy offering pounds 30,000 of cover for a couple living in Liverpool varied from pounds 150 to pounds 575. For an identical couple living in Wembley, the range was pounds 136 to pounds 321.

As well as getting a range of quotes, you may be able to cut costs by exploiting the various discounts on offer. Insurers often offer discounts if you are a member of a Neighbourhood Watch scheme, for example, or have an alarm system fitted by a National Approved Council for Security Systems (Nacoss) firm.

You may also be able to save money by agreeing to pay a higher excess, by having a clean claims record, or even, in the case of a policy offered by Hill House Hammond, a broker, by owning a dog that barks.

Next week: buildings insurance.

Jean Eaglesham works for `Investors Chronicle'.