When it comes to settling a claim with your insurer, you may have the option to receive your payment in cash instead of having repairs made or replacement items provided. This is known as a “cash settlement.”
There are a few reasons why you might choose to cash settle with your insurer. For example, you may want to use your own builder to undertake the repairs, or you would like to use the funds to make improvements or changes to your property (including making your property more resilient to future disasters). Under most policies, it is within your rights as a policyholder to receive a cash settlement.
In some circumstances, it may be the Insurer who elects to cash settle your claim, including where your insurance policy does not cover the full cost of repairing or rebuilding, or there was pre-existing damage that is not covered by the policy.
Regardless, whether it is you or the insurer who elects to cash settle, it’s important to keep in mind that there are also potential downsides to cash settling. For one, when you undertake repairs through an insurer most offer a ‘lifetime guarantee on repairs’, meaning that if there are any issues with the quality of repairs the Insurer is required to cover the costs of fixing the problem.
Here are our top 10 tips to consider when cash settling your home building claim:
- Read Your Policy – When considering accepting a cash settlement for your insurance claim, it’s crucial to thoroughly review your policy to ensure you’re claiming all available benefits to maximise your pay out. Be aware that some policies may have terms and conditions regarding cash settlements, so it’s essential to understand the potential consequences before accepting.
- Assess the Scope of Works – When your home has sustained property damage, the insurer will typically send out one of their panel builders to assess the repairs needed and provide an itemised list of requirements in a document called a Scope of Works (SOW). It’s important to carefully review the SOW and compare it to the damage in your home, going through each room and noting any discrepancies. Common errors we observe include repairing items that should be replaced, using inferior materials, or not including certain items such as air conditioners or light switches. It’s also common for insurers to provide a redacted SOW, where the prices for each item are not included. If this happens you should request an unredacted SOW from the insurer and please don’t hesitate to reach out to us for assistance if they are unwilling to provide this.
- Get your own Quote – Obtaining your own quote for the damage sustained to your property can be important because the insurer’s quote may not accurately reflect the full cost of repairs. The insurer’s builder may not include all necessary repairs or may use lower-quality materials to keep costs down, as they may have contracts in place with agreed prices lower than what ordinary consumers can obtain. By obtaining your own quote, you can ensure that all necessary repairs are included and that the cost is reflective of the true value of the repairs. Additionally, some insurance policies state that if you elect to cash settle, you’re only entitled to the amount the insurer can get the work completed for, which may not be the full cost of the repairs. If your insurer is telling you this, please do not hesitate to contact us because, depending on your circumstances, that may not be necessarily the case.
- Consider variations- When reviewing the Scope of Works (SOW) and assessing the damage to your property, it’s important to consider the potential for variations in the repair process. Variations occur when additional damage or cost is discovered during the repair process, which can result in significant additional costs. You will often see in the insurer’s builders quote a disclaimer acknowledging the potential of future variations. Some common variations in building repairs include identifying asbestos, attempting to repair something that requires replacement, or attempting to clean something (e.g. sliding door tracks) that may not fix the problem. A cash settlement should account for all likely and necessary repairs and should include an allowance for contingencies in case of variations. See the tip below about contingencies and how much the insurer should be allowing.
- Contingencies – It’s essential that when accepting a cash settlement from an insurer, they include an additional allowance above their Scope of Works (SOW) for contingencies. This allowance considers factors such as transferred risk, the actionability of the insurer’s quote (i.e. whether it includes all likely repairs), and the possibility of additional damage. When cash settling the insurer is transferring the risk of further damage or costs to you and the contingency needs to consider this. The percentage for this allowance typically ranges between 10-25%. A higher percentage is usually appropriate when there is a higher likelihood of unforeseen damage, additional work, and the quote is not actionable. The contingency amount should be in addition to the total of the SOW. However, it is important to note that in many cases, insurers do not make this allowance without customers requesting it. Therefore, If your insurer is unwilling to make an allowance for contingencies on top of their quote, or you have accepted a cash settlement that didn’t include an allowance for contingencies, please reach out to us today and we may be able to help.
- Deed of Release – An insurer may require you to sign a Deed of Release as a condition of accepting a cash settlement for your claim. This document is typically intended to release the insurer from any further liability or responsibility related to the claim. However, it’s important to be aware of the terms and conditions outlined in the Deed of Release before signing it. The insurer may include clauses that limit your ability to make future claims or seek additional compensation, which can leave you at a disadvantage if additional damage or repairs are needed. Therefore, it’s crucial to ensure that the cash settlement includes the likely cost of repairs and an allowance for contingencies. Not all insurers make their customers sign Deeds of Release, so it’s worthwhile asking your insurer if a deed of release is required. If an insurer insists on you signing a Deed of Release, it’s highly recommended to seek independent legal and financial advice to protect your interests.
- Consider Cash Settlement Factsheet – When offering cash settlements to customers, Insurers are required to provide a Cash Settlement Factsheet prior to accepting a cash settlement. The Cash Settlement Factsheet must include: the options for settlement legally available under the insurance product, the sum insured under the insurance product, the amount of the cash settlement they’re offering in total, and a breakdown of each component and a statement that a customer should consider obtaining independent legal or financial advice before agreeing to the cash settlement. Penalties apply to insurers for not providing a Cash Settlement Factsheet. You should read the cash settlement factsheet carefully before accepting a cash settlement.
- General Insurance Code of Practice – The General Insurance Code of Practice (Code) is a voluntary code of conduct that sets industry standards for general insurance companies in Australia. Most Australian insurers are required to comply with the Code. The main objective of the Code is to enhance customer service and improve the claims process by setting high standards for claims handling, customer service, and dispute resolution. If you suspect that your insurer is not adhering to the Code, it’s essential to raise this with them. If you’re not satisfied with their response you can refer your complaint to the Australian Financial Complaints Authority (AFCA)(see 9. Make a complaint below). A copy of the Code can be found on the ICA’s website here, it’s a great tool to have access to so that you can understand your rights and the obligations of the insurer.
- Make a complaint – If you’re dissatisfied with the cash settlement amount offered by your insurer, it’s important to make a complaint. Insurers are subject to strict timeframes and requirements when responding to customer complaints. When making a complaint, it’s essential to clearly outline your concerns and the remedy you’re seeking. It’s also important to express your complaint in a manner that does not include aggressive or abusive language. All insurers should have information on their website about the process for making a complaint. The timeframes for complaint responses vary, but for most property insurance complaints, insurers must respond in writing within 30 days. If you’re not satisfied with the insurer’s response, you can refer the complaint to the Australian Financial Complaints Authority (AFCA). AFCA is a free service for consumers, and its decisions are binding on insurers. Remember that AFCA is there to help consumers, and you should not be concerned about making a complaint to them. It is noted, AFCA has received a significant increase in the number of complaints during 2022, and are experiencing delays to their normal timeframes. Therefore, it is important to clearly structure your submission in a way that makes it easy for them to understand and respond to. If you have any questions or concerns, feel free to reach out to us, and we can help you through the complaint or AFCA process.
- Get help – If you’re not satisfied with the way your insurer is handling your claim or if you feel that your concerns are not being heard, it’s important to seek help. There are various resources available to support you through the claims process. One such resource is us at Claims Hero, we offer a free 30-minute consultation for consumers to help them navigate the claims process. You can book a free consultation directly through our Facebook page, alternatively, you can visit our website at claimshero.au, or call us on 1300 219 469.
It’s worth noting that we may not be able to help in all circumstances. However, there are free services that can provide support to consumers, including the Australian Financial Complaints Authority (AFCA), legal aid, and other local free counselling services which can be found online. These organisations can provide additional assistance and help you understand your rights and options.
This blog post is for educational purposes only and does not consider your personal situation. It is strongly advised that you seek professional legal or financial advice before taking any action based on the information provided in this blog.