Just before Christmas a fire broke out in Nigel Wheeler’s home in Sheffield in the early hours of the morning. No one was injured, but the cost of repairing the damage to the kitchen ran into thousands. The cause turned out to be an unlikely arsonist in the shape of Mr Wheeler’s black labrador, Max.

“He tends to pinch things from the kitchen counter,” Mr Wheeler explains. “That night, I had left a carrier bag near the hob. He jumped up and managed to turn the knob and put his paw on the ignition button.”

The carrier bag caught light and the resulting fire damaged the kitchen units, hob, work surface and fridge freezer. Smoke spread through the kitchen and into the conservatory before the fire burned itself out. Mr Wheeler’s home contents insurance covered the £5,000 repair bill, but his case highlights just how easily accidents can happen – and the importance of ensuring that you have adequate cover.

About three million British households have no home contents insurance, figures from Abbey show, while 5.5 million households are thought to be underinsured. Only four in ten people take the time to check the details of their household cover when they purchase the policy.

Note that underinsurance has a more insidious effect than you might have thought. The problem is not simply that the insurance company will cover you only up to the amount that you have insured – it may not even do this.

Vicky Emmott, senior manager of underwriting at Halifax, the bank, says: “It is important to insure your contents for their full replacement value. Halifax Home Insurance offers unlimited cover for contents, but some insurers offer sum-insured products, which make the customer responsible for ensuring that the sum insured is adequate. Failure to assess value correctly may result in a claim payment being reduced and the amount of the reduction will be linked directly to the amount by which the items are underinsured.”

For example, if you have stated a sum insured of £20,000 and your actual home contents value is £40,000, your insurer may adjust any claims and pay out only 50 per cent. In some cases, where you are perceived to be significantly underinsured, the insurer may not pay out at all.

The accumulation of electronic gadgets and a boom in collecting, driven by auction sites such as eBay, has meant that the value of the average home contents has soared in recent years. The best way to ensure that you have sufficient cover is to tour your home and make a room-by-room inventory. Do not forget to include furniture, carpets, curtains and clothes, and try to recall when you purchased or were given the item. If you have receipts, keep them.

Once you have established a reasonable contents value, you can then look for the right policy. While it is easy to search for the cheapest policy on the internet – sites such as Insuresupermarket.com make cost comparisons simple – price should not be your sole consideration. You also need to think about quality of cover.

Does your policy offer new-for-old cover? In other words, will your four-year-old laptop be replaced with a brand new one if it is stolen, or will you have to settle for an older model? Are your personal possessions covered outside the home? Some policies will cover your bicycle, baby buggy or the contents of your handbag once your remove them from the house, but in most cases this is an optional extra, not part of the standard cover.

Other extras to look out for include legal cover – which could pay for things such as disputes with neighbours – freezer contents cover, sports equipment cover and garden equipment cover.

You also need to look at the level of cover. For example, how much is the single-item limit? On some policies, this can be as low as £250 to £300, while more comprehensive policies will offer single-item limits of £1,000 to £1,500. Hiscox , which markets insurance policies to high-net-worth individuals, has a single-item limit of £5,000.

You will also need to consider your payment method. Many insurers charge between 3 per cent and 10 per cent extra for paying by monthly direct debit, rather than a lump-sum premium, although there are a few – including Hiscox and Marks & Spencer – who do not. Another factor to consider is whether your insurer offers a no-claims discount (NCD). While these are common on car policies, when it comes to home contents cover only 60 per cent of policies offer NCDs, which can reduce your premiums by as much as 30 per cent if you make no claims for five years.

How to cut your premiums

Lower your security risk. Installing burglar alarms, superior locks and security lighting can help, as can joining a neighbourhood watch scheme.

Raise the excess. The more that you are prepared to pay in the event of making a claim, the lower your premiums should be.

Pay annually rather than by monthly direct debit. If you pay with a credit card, make sure that the interest is lower than the charge your insurer would levy for direct debits.

Some insurers offer a discount if you “freeze mark” valuables with a special type of pen and then register the numbers with a security company.

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