Basis of settlement
Also known as: Basis of cover Settlement basis Claims valuation basis
The basis of settlement is the method an insurer uses to calculate the value of a valid claim. The two main bases are replacement cost (new for old) — paying what it costs to replace a lost or damaged item with a new equivalent — and indemnity (market value) — paying only the depreciated value of the item at the time of loss.
The two main bases compared
Replacement cost (new for old)
- Pays what it costs to buy a new equivalent item today
- No deduction for age, wear, or depreciation
- Standard for most UK home contents and buildings policies
- Higher premium than indemnity basis
- Better for items that depreciate quickly (electronics, appliances)
Indemnity (market value)
- Pays the item's value at the time of loss — depreciated
- Deduction made for age and wear
- May appear in older or specialist policies
- Lower premium than replacement cost
- Can leave significant gaps for heavily-used or older items
Where the basis of settlement matters most
The difference between bases is most significant for:
- Home contents: A new-for-old policy replaces your two-year-old television with a new equivalent; an indemnity policy pays its current second-hand value, which may be 40–60% less
- Buildings: Most policies use reinstatement basis (the property equivalent of new-for-old); some commercial policies use indemnity, deducting for the building's age
- Business equipment: Equipment that depreciates rapidly — computers, machinery — needs replacement cost cover; indemnity may leave you unable to replace what was lost. See our business contents guide for calculating the right sum insured
For homes, the ABI rebuilding cost guidance explains how to calculate an accurate reinstatement value for buildings insurance.
Interaction with averaging and sub-limits
The basis of settlement determines the gross claim value before other policy mechanisms apply. The actual payout may be further reduced by:
- Averaging: If under-insured, the replacement cost payout is reduced proportionally — see averaging
- Sub-limits: Many policies cap single-item payouts (e.g. no more than £1,500 for any one item without specification) — see sub-limit
- Excess: The standard policy excess is deducted from the settlement regardless of the basis
Basis of settlement FAQ
Frequently asked questions
- New-for-old cover replaces a lost or damaged item with a new equivalent — not necessarily the same brand or model, but of equivalent specification and quality. If your five-year-old laptop is stolen and the model is discontinued, the insurer will replace it with a current equivalent. Insurers do not add betterment charges under new-for-old policies. However, some policies cap the new-for-old benefit at a certain age (e.g., items over 10 years old may revert to indemnity basis). Check your policy.
- Depreciation is the reduction in value of an item over time due to age, wear, and use. Under an indemnity basis, the insurer applies depreciation to calculate the item's value at the time of loss. A laptop bought for £1,200 three years ago might be worth £400 at depreciated market value — that is what an indemnity policy pays, not the £1,200 cost of a new replacement. Depreciation is most significant for electronics, appliances, and high-wear items. For properties, the indemnity equivalent is "actual cash value" — see our entry on actual cash value.
- Most standard UK buildings insurance policies settle on a reinstatement basis — paying the cost to rebuild or repair the property to its original condition, which is the property equivalent of new-for-old. An indemnity basis for buildings (paying the current value of the structure, including age depreciation) is less common in standard consumer policies but may appear in older or specialist commercial policies. Check the "basis of settlement" or "basis of cover" section in your policy wording.
- Yes — but in different ways for different bases. For a new-for-old policy, the sum insured should represent the cost of replacing all covered items with new equivalents today. For an indemnity policy, the sum insured should represent the current market value of all covered items. Either way, the sum insured must be accurate — under-insuring triggers averaging regardless of the basis. For how averaging works, see the averaging glossary entry.