The firm, Stewart Hughman, had refused to give Jo Thompson pounds 400 for the stolen watch until she supplied a receipt to prove that a replacement had been bought.
Mrs Thompson convinced a small claims court in London that the terms of her policy did not force her to show proof of new purchase before she received compensation.
The case has implications for thousands of policyholders who are forced to produce receipts before their insurers pay up.
Richard Houseago, a partner at Jarvis & Bannister, a law firm that specialises in insurance litigation, said: 'The decision is not binding in the sense that it would be binding in a higher court. A small claims court is there to arbitrate.
'But unless the terms of a policy state otherwise, the key issue is proof of prior ownership. Proof of replacement is not part of the law.'
Mrs Thompson said: 'I had proof of purchase of a new watch, but I refused to send it in because the terms of my policy did not specify that I had to do so. They are supposed to pay for the expected cost of the replacement, not wait for it to be bought first.
'If they want to force people to show proof of purchase, they should say so in the contract. In that case, their business would suffer. How many people would be prepared to pay up-front for an expensive ring or a car which has been stolen?'
Her court victory marks the end of a 16-month compensation battle that began in July last year, when she went on holiday to France with her husband.
On the first night of their stay, a burglar climbed through the window of their apartment and stole Mrs Thompson's handbag, which contained about pounds 370 in French currency and the watch.
As soon as the couple returned to London, Mrs Thompson put in a claim for her loss. She received a cheque for pounds 320 to cover her currency loss ( pounds 50 excess), but the loss adjusters demanded evidence that she had bought a new watch before they would pay the additional money.
Mrs Thompson complained directly to Lloyd's, which offered to act as mediator. Lloyd's also asked for proof that the stolen watch had been replaced.
'I finally decided that I would go to court. After enormous effort, I managed to discover who to issue a summons against at Stewart Hughman.'
The court awarded her the cost of a new watch, plus interest over the past 16 months, together with witness fees and hearing costs, totalling pounds 518.
A spokesman for Stewart Hughman said the company would now pay for the watch but was considering an appeal over the cost element of the award.Reuse content