How are building claims settled?
If your home or building has been damaged and you have submitted a claim that has been accepted by your insurer, your claim will typically be settled by:
your insurer organising a builder to conduct the repairs that have been agreed with you (through a scope of works); or
offering you a cash settlement.
Insurance policies can differ in terms of how settlement processes work. If you have a preference for how you would like your claim to be settled, you should speak with your insurer.
What is a cash settlement?
A cash settlement means the insurer provides you with a cash payout, leaving you to manage the repair or rebuild yourself.
Cash settlements can be for part of the repair or for full amount of your claim. However, if further damage only becomes apparent after repairs have begun, you may ask your insurer to reopen your claim, so that the additional damage can be assessed.
If you accept a cash settlement and appoint your own builder, your insurer may not guarantee the quality and workmanship of the repairs. Therefore, if there is a fault with the repair work, you will need to seek rectification from your builder.
In some circumstances where significant repairs are required, accepting a cash settlement and managing the works yourself may mean that your insurer will no longer be able to insure your property, until the repairs are completed. Your insurer will notify you if this will be the case when discussing a cash settlement, and it is important to consider the implications of not having insurance cover on the property while significant repairs are underway.
If it is available under your policy, some of the benefits of an insurer-managed rebuild are:
Your insurer will appoint a claims coordinator or project manager to make sure the works are carried out with the least disruption possible;
Your insurer will provide guarantees on the workmanship and quality of the repairs under s7.20 of the industry Code of Practice.
Your insurer will typically maintain insurance cover over the property whilst the repairs are under way.
To deliver these benefits, insurers prefer to appoint experienced builders with whom they have an established relationship. These builders have a proven track record of quality workmanship and timely delivery of services.
If you are considering a cash settlement, also consider the availability of suitably qualified builders in your area. If your home or building was damaged in a disaster, it may take considerable time for a local builder to be available.
You may also choose to speak to a financial counsellor before deciding on accepting a cash settlement.
Why is my insurer only offering a cash settlement?
In some circumstances, a cash settlement may be the only available option to settle your claim.
Some of these circumstances include:
Where your building has pre-existing damage or maintenance issues that needs to be repaired first (by the owner), before insurable repairs can proceed;
Where you are under-insured (the value of the works exceeds the amount of insurance that you chose to purchase to cover the property);
Where the damage is only minor;
Where the policy you have purchased gives the insurer the discretion to choose to cash settle, rather than coordinate repairs on your behalf;
Where you, as the policyholder, do not wish to rebuild or repair the property; or
Where it would be unsafe to rebuild, or the local consent authority will not allow the rebuild to occur.
Talk to your insurer about the reasons it may be offering you a cash settlement.
Do I have to repair my house with the cash settlement?
You are entitled to spend your cash settlement in any way you choose.
However, your building will not be insurable if repairs are not carried out. If your home is damaged in the future, and you failed to repair previous damage, any insurer is likely to decline your claim.
If you have a mortgage, your lender may have rights to the cash settlement. In some cases, your bank may retain your cash settlement to ensure the money is spent on repairing your property, or use the settlement to reduce any mortgage on the property. Before a cash settlement occurs, make sure that you understand how your lender may wish to proceed.
Why is my cash settlement less than the value I need to preform the repairs?
Typically, the value of a cash settlement will be the amount that it would have cost the insurer to perform the repairs or rebuild on your behalf. Many insurers use large building firms, at agreed rates, so that local inflation factors don’t force premiums to rise unchecked in subsequent years. If you seek quotes from your own preferred builder to perform the work, that builder may not deliver the works and necessary supplies at the same rates that your insurer can achieve. In these circumstances you may find that the cash settlement you are offered may be less than the quotes supplied to you by your own builder.
In some circumstances a cash settlement it may be less than the amount your insurer would have paid its own builder. This is because the insurer’s builder may be from out-of-area and has included allowances within its quotation for expenses (such as accommodation and transport). These costs may not be incurred by local builders and therefore may not included in your cash settlement amount.
Unhappy with how your claim is being settled?
If you are unhappy with how your claim is being settled, contact your insurer to discuss.
If you would like further general information, you may contact the Insurance Council on 1800 734 621.