Broken iPhoneThe Financial Conduct Authority (FCA) has found that there are problems in the design of mobile phone insurance, in the fairness of the small print, in claims handling, and also with sales practices.

More than ten million people have mobile phone insurance, according to the Association of British Insurers. It can cover the cost of replacing a phone that is lost, stolen or damaged, although each insurer has different terms. Some insurance covers the cost of unauthorised calls as well.


Several problems uncovered
In a review of the insurance, the FCA found that it isn't designed to serve customers' needs properly, which is why too many claims are rejected; for example, the majority of insurers don't cover you if you accidentally leave your phone somewhere because you've "left your phone in a public place", which is excluded.

It found vague and wide open phrases in the small print. For example you would not be covered for loss or theft in "a place which is easily accessible by people you do not know". It's easy to see the problems when that small print is highlighted to you.

The FCA saw cases where insurers reject claims if you don't have your usual SIM in the phone or haven't used your phone for a while – even as little as two weeks. Apparently this is to reduce fraudulent claims, but in its review the regulator saw real examples of legitimate reasons customers would not have their normal SIM or make calls for a while.

It also found that one firm was declining 41% of all theft claims.

The FCA review reveals that some firms are incredibly slow to deal with claims. While some dealt with claims in one to three days, others took a whole month.

For technical reasons, the FCA's review didn't cover sales practices to a great extent, yet it still found that in-store documents on the insurance were unclear and with online phone sales insurance was often being added on by default.

Insurers were also found to reject claims unreasonably. One rejected a claim because the customer reported it just a few hours after the time limit expired, even though his delay had no effect on the insurer's ability to limit losses on the claim or to assess the loss.

The regulator also found that some firms that rejected claims were overturning their decisions 70% of the time if customers appealed, which indicated a policy of reject first. Some firms accepted complaints in writing only, which goes against the regulator's claims-handling rules, and can only lead to more people not carrying through with their complaints.

Big fine
The FCA has followed up its investigation by slapping Policy Administration Services, which handled policies sold by Phones 4U, with a £2.8 million fine.

The fine was due to poor complaints handling, which included:
  • not investigating complaints full, or resolving them appropriately or consistently
  • rejecting complaints about mis-selling simple because the customer had signed a direct debit form
  • Failing to investigate root-cause of complaints

Majority of disputes settled in customers' favour
Firms who took part in the review have promised some changes. The full extent of their efforts to improve remains to be seen.

In the meantime, the free Financial Ombudsman Service, which helps us to resolve our individual complaints when we think financial firms are treating us unfairly, says that it settles more than seven out of ten complaints about mobile-phone insurance in favour of the customer.

The main complaints include:
  • Companies selling policies without properly explaining the exclusions – which would have put off many customers.
  • Companies selling the insurance without advising them to check other policies, such as home insurance, to see what existing cover they already have.
  • Insurance policies not automatically being updated when customers receive their new phones.

If you want to get the FOS involved, be sure to read: How to complain to the Financial Ombudsman Service.



The high cost of this insurance
The regulator rarely reviews the prices that financial companies charge, even where it's easy for them to price products highly for captive markets. This is the case with mobile insurance, since it's usually sold as an add-on by the phone retailer, a network, or even a bank. Add-ons are easy to charge an arm and a leg for.

Cost was not covered in this FCA's review either, yet I did some simple maths a while ago that showed the price is usually extremely high for the risks involved. Divide the cost of the phone by the cost of the insurance, and I estimate that you might have to lose your new phone right after you receive it once every three to six years in order to make the price worth it in the long run.

And that's assuming the small print never catches you out when you try to claim.
In other words, even if you're on a contract with a mobile phone and upgrades included, it would be cheaper for most people to buy themselves a brand new phone whenever they lose them than to use the insurance sold by networks, banks or mobile-phone retailers!

Cheaper alternatives
A cheap insurance policy for those on a contract that includes a phone is to have a second-hand phone as a back-up, and to make do with the older technology for a while.

I bought a second-hand, internet-enabled Sony Ericsson smartphone for less than £5 in January. That was a particularly good bargain, but cheap back-up phones at very low prices are remarkably easy to get hold of and much more cost-effective than paying for phone insurance every year.

If you really want insurance, there are independent providers who offer cover at a much fairer price than mobile phone retailers, the networks, big-name insurers and banks, and sometimes with better terms too.

Do you have mobile phone insurance? Have you ever had to make a claim on it? Let us know your experiences in the comment box below.