Claims are generally settled on a “New for Old” or “Indemnity” basis. Simply put, a claim settled on an Indemnity basis will have an amount deducted for “Wear and Tear” The principle behind an indemnity settlement is the financial restoration to the same situation that existed just before the loss. In other words it puts you back in the same financial position you were in prior to the loss, so that you are no better or worse off than you were immediately before the loss.
If your claim is going to be settled on an indemnity basis, the amount you will receive will be based either on how much you would pay for the item second-hand, the “Market Value”, or the actual replacement cost of the item less an amount age and use, sometimes also referred to as “Depreciation”
As an example, say you have an expensive bicycle stolen from your home. It cost £1500 two years ago. This type of item can depreciate in value quite quickly and to buy the same model that is also now two years old would cost £800. If your policy also has a £100 excess, your claim will be for £800 less the excess and you will actually receive £700. There is nothing wrong with the claim being settled in this way. However, over the years I’ve encountered so many people who have been disappointed in a settlement like this purely because they were unaware, until it was too late, that this is how the policy will be effected.
Some policies which are set up on a “New for Old” basis actually have elements of them that will be an “Indemnity” basis. Typically clothes and some other personal effects, or furniture that may be deemed over a designated age can , and will, be settled based on replacement cost less an amount for wear and tear.