Mobile phone insurance - it's a steal?

This article by Andrew Bibby, in a slightly different form, was first published in The Observer, 2004

Mobile phone shops are gearing up for a bumper Christmas, the first time that the much-vaunted ‘third generation' handsets will be widely available in Britain .

But the profits they will make won't only be on the mobile phones. Mobile phone insurance may be a lot less sexy than the handsets themselves, but selling add-on cover is an extremely valuable earner for the shops. Like extended warranties in electrical stores, customers should be prepared for the hard sell.

Indeed, all sorts of companies are trying to muscle in on the mobile insurance market. Take Emily Marshall's experience, for example. Emily, a gap year student living in Hertfordshire, recently bought a new Nokia 3200 handset, which comes complete with a digital camera, an FM radio, a voice recorder, a games facility and much else besides. She shopped at Phones4You and agreed to sign up for the standard £7.99 a month insurance package, arranged by Phone4You's sister company PAS.

But then a few days later she got a call on her mobile. “I was rung up by people claiming to be PAS, offering what they said was a better deal,” she says. The new premium would be £6 a month, she was told, and Emily readily agreed to make the change. First, however, she was asked to give her bank account details. “I said, surely you should have those already. They said, we do, but we need to get them from you again because of the Data Protection Act,” she says.

Her caller was, in fact, not PAS but one of an increasing number of firms who are acquiring the numbers of newly-issued mobiles and who are then cold-calling customers. With handsets now much more sophisticated than traditional mobile phones, the sale of insurance is beginning to take on the feel of a gold rush.

Everyone, it seems, can have a piece of the action. One UK direct sale website is currently boasting “We have people making easy sales helping customers insure their phone and earning HUGE amounts for doing so little”. HUGE is underlined and in bold, and the webpage begins with the enticing promise “Follow these three easy and proven steps to make an extra £12,220+ each and every month”. In fact, the website is advertising for ‘associates' who agree to sell a particular policy, in exchange for £15 commission per customer. ‘Associates' earn an additional fee if in turn they can recruit ‘sub-associates'.

With all this flurry of excitement, it is perhaps unsurprising if the major mobile phone insurance companies are paying attention. Lewis Porter, manager of PAS's eight-strong Security and Risk department, is monitoring the activities of the cold call companies, some of which, he is anxious to point out, operate fairly and are legitimate competition for his own company. However, he adds: “An element are using tactics which they shouldn't be using. What they're doing is passing themselves off as companies which they aren't,” he says.

This was Emily Marshall's complaint, too. Having given her bank details, she was shocked to find shortly afterwards that an unexplained £37 initial charge had been taken from her account. After the intervention of trading standards officers, she has now been promised this money will be refunded.

The problem with mobile phone insurance, however, is not limited to the dodgier end of the market. One problem can be the policy exclusions written into the small print. “A lot of people take out insurance and presume it covers them for everything. But when they lose their phone or when it's got wet, they find it doesn't cover them after all,” says Jenni Conti, principal researcher at Which? magazine. “You can be paying a significant amount of money for something which is worthless,” she adds. Which? in November 2004 reported the case of one customer whose claim for a lost phone was initially rejected on the grounds that, in losing it, he had breached the condition requiring him ‘to take reasonable care' of it. The claim was allowed only after Which?'s intervention.

There are effectively two main reasons for insuring a mobile phone: firstly, to meet the replacement cost of a lost, damaged or stolen handset and secondly to cover the risk that high charges will be racked up on your account by someone who gets hold of your phone. In fact, for pay-as-you-go customers there is almost no need for cover: the most that can be lost is the credit already held in the phone and a new handset can simply be obtained with a new pay-as-you-go package. Customers with contracts have potentially more to lose, since monthly charges will be payable even if the phone itself has disappeared. However, it may still be better (particularly towards the end of a minimum contract period) to carry this risk yourself. One ploy suggested by Jenni Conti is to keep an old mobile phone in reserve. If need be, this can then be used with a (low cost) replacement SIM card until the minimum contract period is up.

There is an even simpler solution for many mobile phone users, and that is to add the phone to an ordinary household contents policy. Whilst this may require paying for the addition of ‘all risks' cover, it can work out much cheaper than a stand-alone phone insurance policy.

Jenni Conti advises mobile phone purchasers this Christmas not to pay up for insurance without checking carefully what they are buying. “Sales assistants may say that insurance can be bought only at the point of sale but there are stand-alone policies you can buy. Don't be pressurised,” she advises.