Home insurance cash payouts could leave you short-changed

Homeowners making a home insurance claim are increasingly being offered cash settlements instead of insurer-managed repairs. But ASIC is warning that these insurance payouts may not cover the full cost of fixing damage, potentially leaving policyholders out of pocket.

If you're trying to get your insurer to repair an issue with your home, your claim might be one of the 63% resulting in the offer of a quick cash settlement. Taking the money might seem easier than waiting for the insurer to arrange the fix themselves, but should you?

The latest research from ASIC recommends carefully considering such offers before accepting them, with the corporate regulator warning home owners taking cash from their insurers could be shortchanged.

In a recent review of the practices of five major home insurers, ASIC found 63% of claims involved providers offering customers cash to arrange their own repairs, instead of the insurer doing this themselves.

While cash settlements can allow consumers to get repairs done more quickly, ASIC found many of these offers didn't reflect the total cost customers would face when arranging a fix themselves.

Key to the issue was the fact that 52% were based on a single quote, often from the insurer's preferred supplier, who might be offering them a discounted rate.

ASIC says individuals could struggle to get the same price when negotiating with suppliers on their own and might also have to deal with unexpected costs that can arise during the repair process.

"The easy option for insurers can be the expensive one for homeowners," says ASIC commissioner Alan Kirkland.

"If the amount falls short, consumers can be left shouldering the cost of repairs and paying the difference out of their own pocket".

Why home insurance cash settlements can fall short

Financial counsellors aren't surprised by ASIC's findings because they often see cash insurance settlements after natural disasters leave customers worse off.

"A cash settlement can look like the quickest pathway forward, but it can also transfer significant financial and practical risk from the insurer to the person who has just experienced the disaster," says Louise Hayes, disaster recovery coordinator at Financial Counselling Australia.

"Many people don't realise that once they accept the payment, they may be responsible for any additional repair costs," adds Julia Davis, external relations and advocacy principal at the Consumer Action Law Centre.

"We have seen lots of examples of cash settlement offers that were inadequate to repair all of the claimable damage".

Advocates say offers aren't coming with enough information to allow consumers to know if they should take them or not. ASIC says insurers should do better.

"Insurers need to ensure cash settlement offers are realistic, transparent and properly explained," says Kirkland.

"Consumers need enough information to know if a cash payout will genuinely cover the cost of repairs, and if it is the right outcome for them".

What insurers say about cash settlements

The Insurance Council of Australia says cash settlements can offer flexibility - something ASIC agrees with - and allow homeowners to get repairs done quickly, prioritise certain jobs and not be restricted to their insurer's choice of builder.

But it also admits settlements sometimes aren't big enough to cover the full cost of repairs and that work done by a builder of your choice may not be covered by your insurer.

Should you accept a home insurance cash settlement?

How to protect yourself before accepting a payout

Get the details: Ask your insurer to explain what's included and excluded from the settlement, including any repairs already done, as well as costs for temporary accommodation, debris removal, storage or other policy benefits.

Make sure it's enough: Check your cash settlement fact sheet to make sure your insurer has included all the repairs that need to be done. You could be left out of pocket if work ends up costing more than the settlement amount.

Get your own quotes: Your insurer's settlement figure might be based off a discount deal with their preferred builder that you won't be able to access. Try and get your own quotes to see if the amount being offered is realistic.

Know your rights

1. You can decline a cash offer if you'd prefer your insurer manage the repairs themselves. 
2. If the amount offered is too low, ask your insurer to review it, although the review timeframe can vary by insurer and event.
3. If your claim is related to a natural disaster and was finalised within one month of the event, you have 12 months to request a review of the settlement amount 
4. If you find further damage while doing the repairs yourself, stop work if it's safe to do so and contact your insurer for support.

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