Need to know
- You could end up being out of pocket with a cash settlement, as your insurer may only pay what it will cost them to rebuild, not what it will cost you to rebuild
- A cash settlement may not include all the costs, as once you settle your claim, any damage that hasn't yet been discovered may no longer be covered
- It's very important not to sign anything before you've had time to consider the cash offer properly
The devastating east coast floods in February and March 2022 resulted in about 300,000 insurance claims, with some people still waiting to return to their homes two years later.
If you've been waiting a long time and your insurer offers a cash settlement for your claim, you may be very tempted to accept it. If you don't want to rebuild it may seem like a good idea, but there are a number of traps to be aware of so that you don't end up out of pocket.
It's very important not to sign anything before you've had time to consider the cash offer properly. If the damage is significant, you may also want to get legal and financial advice.
How insurers settle home and contents insurance claims
If disaster strikes, you may need to make a claim. If your insurer covers your claim, there are usually three options for settlement. The insurer may agree to:
- replace or repair your item
- repair or rebuild your property, or
- give you a cash settlement.
Accepting a cash settlement may be appealing if, for example:
- jewellery you inherited from family members was stolen and no replacement could ever have the same sentimental value
- you want to make renovations and improvements, like an open plan living area, extra study or new deck, or
- you don't want to rebuild.
When will insurers offer a cash settlement?
Some instances of when an insurer may offer a cash settlement for your home include:
- your council won't allow you to repair or rebuild
- some of the damage to your property isn't covered (e.g. part of the damage to your roof was caused by a storm, but the roof was poorly maintained)
- you were underinsured (e.g. new building standards will make it much more expensive to rebuild).
Top 5 cash settlement traps
1. The cash settlement may be too low
When an insurer offers a cash settlement instead of a repair or replacement, the insurer is required to pay the "reasonable cost", which is the retail cost that you can actually obtain.
Some insurers let you ask for a cash settlement. But be careful – you could end up being out of pocket, as many will only pay what it will cost the insurer to rebuild, not what it will cost you to rebuild.
Insurers have deals with builders, industry knowledge and bargaining power, so they may get a better price than you'd get. If you choose to cash settle, you'll also lose the benefit of the insurer's guarantee for the repairs.
Get a number of quotes to make sure the cash settlement is fair and reasonable, and will be enough to complete all the repairs. If your damage occurred because of a major natural disaster in your area, bear in mind that there may be delays, and costs are likely to go up.
2. The cash settlement may not include all the costs
Once you settle your claim, any damage that hasn't yet been discovered may no longer be covered. Get the damage properly assessed by a builder and make sure the insurer has added some contingency costs. The cash settlement should include any cover you have for extra costs, such as:
- debris removal
- demolition
- professional fees (like those of an architect)
- new building standards
- storage for your contents
- temporary accommodation.
Some insurance policies include cover on top of the sum insured for these costs.
3. Your bank may want your cash
If you've got a mortgage on your home, check with your lender what happens in the event of a cash settlement. Your lender may want repayment of part of the loan, or the cash settlement may even go directly to them. You may also be required to get approval for any works you undertake.
4. Your home may not be insurable until it's repaired
Once you've accepted a cash settlement, your insurance policy is no longer valid and another insurer may not be prepared to insure a damaged property. Try to negotiate with your insurer to get cover until your home is repaired.
5. You'll be your own project manager
Do you have the skills (and inclination) to be an owner-builder? If not, how much will it cost to engage an appropriate person, and are those costs accounted for in the settlement?
What to do if you have a complaint
If you think the cash settlement offer is too low, try to negotiate with your insurer. You have the right to ask the insurance company for all the documents and information relating to your claim, such as expert reports they used to calculate the settlement amount. If you can't come to a satisfactory agreement, make a complaint.
Contact the insurer's internal dispute resolution team. If your complaint is not resolved, contact the Australian Financial Complaints Authority (AFCA) online or by calling 1800 931 678. Other places to get help include:
- Insurance Law Service, phone 1300 663 464
- Mob Strong, Debt Help (for Aboriginal and Torres Strait Islander peoples), phone 1800 808 488.
Stock images: Getty, unless otherwise stated.
