What is a home insurance cash settlement?

If your property is damaged, you may be offered a home insurance cash settlement. But it’s important to understand what’s involved before accepting a settlement, and what steps you can take if you are unhappy with the outcome.

A home insurance policy can help protect yourself financially if your home is damaged by a natural disaster or accident. If the worst does happen, you might have to choose how your claim will be paid out. Your options could include waiting for your insurer to repair or replace the damaged property, or accepting an insurance cash settlement.

It’s a good idea to seriously consider your home insurance policy terms to make sure you are covered appropriately for your circumstances. But also be aware of your insurer’s terms around providing insurance cash settlements.

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How do home insurers settle claims?

There are three main ways in which a home and contents insurance provider might settle a claim:

1. Replace or repair a damaged item
2. Repair or rebuild your damaged property
3. Offer you an insurance cash settlement.

What is a home insurance cash settlement?

A home insurance cash settlement involves your insurer paying out your claim—either in part or in full—rather than replacing or repairing damage to your building. It will be your responsibility to select a contractor to repair or rebuild your home, and use the cash settlement to pay their fees. Depending on your circumstances, this can sometimes be quicker and simpler than arranging repairs through your insurer.

According to the Australian Financial Complaints Authority, accepting a cash settlement can end the insurer’s obligations in relation to that claim. This means that if repair costs exceed the settlement amount or additional damage is discovered later, you may have to meet the difference yourself. It’s important to check all damage has been noted before you accept an insurance cash settlement, so you can be confident the settlement will cover your repair costs.

Common reasons for being offered a cash settlement by an insurer

The Insurance Council of Australia says common reasons for insurers to offer a cash settlement could include:

• The expected cost to repair or rebuild your property is greater than your sum insured
• At your request, and by agreement with your insurer
• The local council will not allow you to repair or rebuild
• Your insurer can only accept a portion of your claim. This may be because there is damage to your property that is not covered by insurance.

The Australian Financial Complaints Authority (AFCA) notes that if an insurer offers a policyholder a cash settlement, “it must be fair in the circumstances. This means the insurer must exercise its discretion to cash settle in a fair and reasonable way, and the settlement amount must be sufficient for the policyholder to arrange repairs.”;

Why would you accept a cash settlement?

A cash settlement from your home insurance provider might be appealing under some circumstances. For example, if an insured item like a piece of jewellery is irreplaceable and holds sentimental value, a cash settlement might be preferable. Likewise, there may be a situation where you don’t want to rebuild or repair damaged property, and an insurance cash settlement may make more sense for you.

How are cash settlements calculated?

Insurers may send their own experts and assessors to evaluate the damage to your home and/or contents and estimate the potential repair or replacement cost. The value of a cash settlement may be based on the repair methods, labour, and materials involved in a repair.

When an insurer offers you a cash settlement, it should be able to clearly explain the reasoning behind its calculations, and answer any questions you may have about the process.

What to know before accepting a cash settlement

If you are tossing up whether or not to accept a home insurance payout instead of repair, it could be worth considering the following:

A cash settlement may be less than you expect

An insurance cash settlement may turn out to be less than the amount the insurer would have paid its preferred builders. To make sure you are being offered a fair settlement, it could be worth doing a bit of your own research so you can negotiate with your insurer and ask them to pay a higher amount if needed.

It may be a good idea to proactively get in touch with a few builders, independent of your insurer, to get some quotes so you have a good idea of what the required repairs would typically cost. You could ask the contractor to provide a letter explaining the building materials and labour costs.

The insurer may pay for you to live in temporary accommodation

If the damage to your home is severe, making it uninhabitable for you and/or your family while it is being repaired or rebuilt, then there may be the option to negotiate the terms of your settlement with your insurer to have them pay for temporary accommodation.

It may be a good idea to check whether the accommodation costs will be paid on top of the cost to repair the property.

Your home may not be insurable until it is repaired

In some circumstances, where significant repairs are required, accepting a cash settlement and proceeding to manage the repair or rectification works yourself may mean that your insurer will not continue to insure your property or insure it under the same terms and conditions until the work is done.

If you want to make sure your home is still covered while repairs take place, it may be a good idea to compare your options with other insurers or see if you can negotiate an agreement with your current insurer. Though this could be difficult as many insurers may refuse to insure a damaged property.

You may be responsible for repairing property damage discovered later

While repairing your home, it’s possible you could come across further damage to the property that wasn’t visible at first inspection. Anything not noted as damaged in your cash settlement would leave you liable to pay to fix that damage out of your own pocket.

It could be a good idea to consider possible unexpected future costs in your decision to accept or decline an insurance cash settlement. This is where talking to builders and contractors could help you identify any possible areas of concern and associated costs to repair.

You will be responsible for arranging the repairs to your property

If you decide to accept a cash settlement, you will be responsible for managing the repairs to your property, with all the potential risks that entails. You are typically entitled to spend the settlement funds in any way you choose, which would usually involve covering the cost of tradesmen and materials for any repairs.

You’ll need to ensure you are getting a good deal from your builders

If you accept an insurance cash settlement from your insurer and need to organise property repairs on your own, it’s a good idea to take the time to get a few comprehensive quotes from various tradespeople required to ensure you are getting a fair price for the work. It’s also worth checking if the builder you hire has the required licence and insurance necessary for the job.

Building project costs can sometimes be higher than you expect, especially when you take into account the extra costs of debris removal, demolition and more. As part of your research, it may be worth checking that your cash settlement will be enough to cover as many of these extra costs as possible.

Additionally, the cost of labour and materials could cost more than you anticipate due to circumstances beyond your control, such as a natural disaster. This could affect your decision around whether or not to accept a cash settlement.

It may also be worth considering legal advice for any contract you intend to sign before going ahead.

Your bank may have a claim on the cash

If you have a mortgage on your property, your bank or mortgage lender will have a financial interest in the property. This means if you are paid a cash settlement to repair significant damage to the property, the bank may require you to get approval for any work to be undertaken, so it can protect its interest in your home. You may even be required to pay the cash settlement to the lender.

Before accepting a cash settlement from your insurer, consider contacting your mortgage lender first to confirm what their requirements would be.

Can I change my mind after accepting a cash settlement?

Once you have accepted a cash settlement it is typically final, but you may be able to cancel the settlement if it’s within a certain time period after the disaster or other incident has occurred. Check with your insurer for more details about the cancellation terms of your insurance cash settlement.

What if I want to make a complaint against my insurance company?

If you feel you were not given a fair deal with your cash settlement or were pressured in any way by your insurer to accept a settlement, you may wish for your claim to be reviewed.

The Insurance Council of Australia, the representative body of the general insurance industry highlights the two levels to the claims review process:

• You can lodge a complaint with your insurer, of which they should inform you of the outcome in writing
• If you are unhappy with that outcome, you could lodge a dispute with the Australian Financial Complaints Authority (AFCA), which provides external dispute resolution for consumers who have been unable to solve complaints with their insurer. The decision made by AFCA is binding.

AFCA outlines a number of conditions worth considering before lodging a dispute, including the types of disputes they can and can’t consider.

How can I change my home insurance policy?

If you decide to accept your insurance cash settlement and re-insure with a new provider, or want to be better insured in the case of a wild weather event or accident, you might be wondering how to go about changing your home insurance provider.

A good place to start is to compare your options across various insurers, and be sure to carefully consider the product disclosure statement (PDS) before taking out a policy.

Cover image source: Antonio Guillem/Shutterstock.com