What is a home insurance cash settlement?

Let’s break down what exactly a home insurance cash settlement is, what you should know before accepting one and what you can do if you’re unhappy with the result of your settlement.

To protect yourself financially against the possibility of your home being damaged by a natural disaster or accident, you may have taken out a home insurance policy. If the worst does happen, you may find yourself at a crossroads when it comes to deciding how you want your claim to be paid out. Your options could include waiting for your insurer to repair or replace the damaged property or accepting a cash settlement.

For peace of mind, 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 to be aware of your insurer’s terms around providing cash settlements.

What is a home insurance cash settlement?

A home insurance cash settlement involves your insurer paying you, either in part or in full, your claim, rather than replacing or repairing damage to your building. Depending on the extent of damage to your property, accepting a cash settlement may mark the end of your insurance policy, unless your insurer agrees to continue covering you.

It’s important to check all damage has been noted before you accept a cash settlement, because any damage found after the fact may not be covered by your insurer. Also, when you accept a cash settlement, it will be your responsibility to select a contractor to repair or rebuild your home.

Common reasons for being offered a cash settlement by an insurer

The Insurance Council of Australia states, in a sample document describing the type of information your insurer may provide to you, that common reasons for insurers to offer a cash settlement could include:

• it is unsafe to repair or rebuild the building
• local council or another government body decides that your building is not allowed to be repaired or rebuilt
• there is damage to your building that is not covered by your insurance, which first needs to be fixed by you before the insured damage can be rectified. In this case, the insurer can only partially accept your claim.
• your insurance policy does not cover the full cost of repairing or rebuilding your property to today’s required standards.

The Australian Financial Complaints Authority (AFCA) states 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,” AFCA states.

What to know before accepting a cash settlement

If you are tossing up whether or not to accept a cash settlement with your insurer, it could be worth considering some of the following points:

A cash settlement may be less than you expect

A 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’s 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’s 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

Once you accept a cash settlement it may end your insurance policy, which means your home will no longer be insured. One way to avoid this could be to make sure you can get your property insured again before going through with the cash settlement, although this could be difficult as many insurers may refuse to insure a damaged property.

If you want to make sure your home is still covered while repairs take place, it’s a good idea to compare your options with other insurers or see if you can negotiate an agreement with your current insurer.

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. You are typically entitled to spend the settlement funds in any way you choose, so that would usually involve covering the cost of tradesmen and materials for any repairs.

You may be responsible for repairing property damage discovered later

While repairing a weather-damaged home, for instance, 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, in the case where the settlement ends your claim against the insurer, 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 a cash settlement – this is where talking to builders and contractors could be useful to identify any possible areas of concern and associated costs to repair.

Make sure you are getting a good deal from your builders

If you accept a 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 the various tradesmen required to ensure you are getting a fair price for the work.

It’s also worth checking the builder you hire has the required licences and insurance necessary for the job, and it may be worth considering legal advice for any contract you intend to sign before going ahead.

Can I change my mind after accepting a cash settlement?

According to Legal Aid New South Wales, once you have accepted a cash settlement it is typically final, but you may be able to cancel the settlement if it is within a certain time period after the disaster or other incident has occurred.

Check in with your insurer for more details about the cancellation terms of your 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, outlines two levels to the claims review process:

1. You could lodge a compliant with your insurer, of which they should inform you of the outcome in writing.
2. 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 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.

Updated from a story originally written by Ellie McLachlan.
Cover image source: Paintings/Shutterstock.com