Why buying cheap travel insurance can cost you

Recent events show inexpensive policies may in fact be worthless

"Travel insurance cover you can count on at prices you'll love," one deal proclaims. "Our comprehensive cover includes trip cancellation, baggage and money, hospital bills, repatriation," says another. "Annual worldwide policy for as little as £29."

But two recent high-profile events – the eruptions of Eyjafjallajökull in Iceland and civil unrest in Thailand – have left people wondering whether such claims are too good to be true.

When volcanic ash caused mass flight cancellations last month, insurers refused to pay out for delays or to ferry stranded air passengers home via train or taxi, saying volcanoes were not insurable events. Thailand's latest bloody clashes between "red shirt" demonstrators and troops have prompted a similarly disappointing response.

Many members of the UK's £33bn-a-year general insurance industry are refusing to cover cancellations or visits to Thailand, leaving travellers in a Catch-22, unable to claim if they travel and unable to claim if they don't.

Central to the dissonance between customer expectations and company policies are terms and conditions, which few people read. Although most policies have switched from being single trip ones sold by travel agents to multi-trip ones sold by banks or insurers, exclusions have tended to stay the same.

Generally, the small print excludes civil unrest or terrorism, or countries to which the UK advises against travel. This last exemption is important, because the Foreign Office's advice is surprisingly wide-ranging. At present, it warns against all travel to only one country, Afghanistan, but against visiting parts of 33 countries, many of which are often frequented by Britons, such as India, Israel and Russia.

Due to the "increasingly volatile and tense political situation" in Thailand, Britons are not advised to travel there and those already there should exercise "extreme caution". This week Thomas Cook and Kuoni cancelled Thai holidays, offering customers refunds or re-booking. For independent travellers, the situation is less clear. Airlines are still flying to Bangkok and anyone asking for a refund is likely to fail. British Airways, for instance, is offering re-scheduling until June, but if customers cannot travel by then and want their money back, the answer is "no".

Insurers are unlikely to step in here to make things better. Britain's biggest general insurers, Aviva and AXA, say they will not ordinarily cover cancellations caused by civil unrest, nor fund the early return of holidaymakers alarmed by the political situation.

Some banking groups are showing more flexibility. Part of the RBS group, Direct Line says it will consider paying out for delayed departures, though not for extra expenses within Thailand nor to anyone who bought cover after 23 April. Lloyds says claims for cancellation or curtailment will vary by policy, while two other brands in the same group, Halifax and Bank of Scotland, will cover abandoned or truncated trips.

In essence, confusion reigns because every insurer has a different, or several different policies. The Association of British Insurers justifies this by saying: "There isn't a standard travel policy because there isn't a standard traveller." The terms and conditions, though, are so thickly caveated with exemptions some people wonder whether travel policies are a rip-off. The Financial Ombudsman Service reports that complaints about travel insurance have risen steadily in the past five year to 1,973 in 2008-09. But at 4 per cent of all insurance complaints, it lags behind payment protection insurance (62 per cent), motor (12 per cent) and buildings (7 per cent) policies as a source of public disgruntlement. Spokeswoman, Emma Parker, said most cases involved the failure to cover pre-existing medical conditions, including one where an insurer refused to pay for a cancellation caused by a chest infection on the basis the customer had complained to his GP about a cough; it lost.

Despite all this, Which? recommends people take out travel insurance because most claims involve lost luggage and illness, which can be expensive.

And the free European medical form (EHIC) covers only a fraction of the cost of care, points out its insurance expert Dan Moore. "If you get injured abroad costs can ratchet up very quickly. Which? recommends people have £2m of cover for medical expenses," he said.

No-go areas: Foreign Office advice to tourists

Thailand Around 800,000 British people visit Thailand every year, sampling the exotic charms of the capital Bangkok or beach resorts such as Phuket and Koh Sumui. After the fresh outbreak of political violence, the Foreign Office advises against all but essential travel and warns people to avoid demonstrations and the centre of Bangkok.

India There is a "high threat" from terrorism throughout India. Recent attacks have targeted public places including those frequented by foreigners. The Foreign Office advises against all travel to rural areas of Jammu and Kashmir, pictured, other than Ladakh; all travel to the Pakistan border, other than at Wagah; and all travel in Manipur and Tripura.

Israel (and Occupied Territories) The Foreign Office warns against travel to Gaza and urges vigilance in Jerusalem and the West Bank. UK passport-holders should beware of suspected fraudulent use of British passports by Israel following the assassination of a Hamas leader in Dubai. The Foreign Office says: "This has raised the possibility that your passport details could be captured for improper uses while your passport is out of your control."

Russia Although Moscow and St Petersburg, above, are considered generally safe, the FO says there is a "general threat from terrorism". It adds: "Attacks cannot be ruled out and could be indiscriminate, including in places frequented by expatriates and foreign travellers." It advises against all travel to Chechnya, Ingushetia and Dagestan. Last year, 176,581 Britons visited the Russian Federation on business and 63,214 as tourists.