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Cash settlement reforms on the cards after inquiry scrutiny

Cash settlements weren’t given top billing in the terms of reference for the parliamentary inquiry into insurers’ handling of flood claims but they have proved a lightning rod for criticism during hearings in Canberra.

“A massive power imbalance exists here,” Victorian Council of Social Service CEO Juanita Pope told the House of Representatives economics committee inquiry. “Customers are taking low cash settlements and copping the hardship that follows because it feels like they don't have much other choice, so we need to change the way that insurers treat their customers.”

The Insurance Council of Australia (ICA)-commissioned Deloitte report into the floods points out that insurers here are more likely to manage rebuilds than in other countries, reducing the burden on policyholders in terms of project-managing work in a challenging situation.

In the US and Japan most insurers provide cash settlements, and in the UK and Canada, there’s a mix of cash settlements and insurer-led rebuild or repairs.

ICA and insurers haven’t provided data on the trends, but cash settlements are often made when sums insured are less than repair costs – and that’s likely an increasing problem given inflation, cost of living pressures and underinsurance rates.

Existing property issues may lead to cash settlements, a policyholder might choose that option and small payments may be made for emergency support or losses such as food spoilage as part of the total claim.

But financial counsellors and consumer groups have given accounts of insurers pressuring vulnerable policyholders into accepting low-ball offers, and have accused insurers of incentivising cash settlements.

Often when financial counsellors and legal experts become involved sums are dramatically increased, the inquiry has heard, with one example citing a sum jumping from $167,000 to $568,000.

Consumer Action Law Centre Managing Lawyer Philippa Heir said people are often confused about cash settlements, and quotes insurers rely on in making an offer can be very different to those an individual can obtain.

“Insurers often offer cash settlements to people who are not equipped to manage the repair process themselves; it's just not possible for them to do it,” she said. “It's important that insurers take into account a person's own experience and their own vulnerabilities when they're making cash settlement offers.”

Financial Rights Legal Centre Senior Policy and Communications Officer Julia Davis said poor behaviour by third parties acting for insurers is an issue, including bullying policyholders into accepting cash settlements.

“I appreciate that in these events the magnitude of claims was so extreme that insurers had to onboard contractors that they hadn't used in the past or wouldn't normally use,” she said. “But, really, that's no excuse. They are their agents. They are an extension of their business.”

Claims handling has been regulated as a financial service since January 2022, following the Hayne royal commission, and insurers have since been required to provide a cash settlement fact sheet to help consumers make informed decisions.

The General Insurance Code of Practice clause 79 also says that “if we offer a cash settlement under a home building policy, we will provide you with information to help you understand how they work and how decisions are made on cash settlements”.

Insurers have said cash settlements are not incentivised, it’s in the companies’ interests to ensure repairs are carried out to standards required, uplifts to sums are provided, and consumers are invited to get in touch if it’s found that the amount is not sufficient.

“Sometimes we have no choice to cash settle because the sum insured has been fully used, but in cases where that is not the case and a customer does want to cash settle, we put contingency payments up to 15, 20% on there because we know that there will be inflation, time, and delays,” Allianz Australia Chief Customer and Operations Officer Brendan Dunne said. 

RACQ executives also said policyholders are encouraged to seek legal advice and to discuss the offer, and the insurer is very conscious of the implications.

“Where something like a roof, in particular, is the source of the reason we've made a cash settlement – where the roof needs replacing in whole or part – if that hasn't been done and the hole or the leak is still in place then we won't reinsure premises that are not in the right condition. This is the dilemma,” RACQ Group CEO David Carter said.

“People are receiving a lump sum of money and it's quite large. It may not be used to repair the home, and these people then find themselves in a vulnerable state the next time the weather comes through. We fully understand the ramifications of that.”

A scheduled independent review of the code of practice currently underway is being conducted in two phases to align with any recommendations from the parliamentary inquiry, and committee member Andrew Gee has already suggested clause 79 on cash settlements is “not really adequate”.

Improvements to the cash settlement fact sheets might be on the cards, with the Deloitte report highlighting that they had caused confusion for policyholders, while oversight of insurer third parties is under scrutiny.

Insurers acknowledge there’s more to do on vulnerability, including in considering the traumas people experience during a natural disaster, as highlighted at the hearings.

“If someone has been rescued from their roof and are then being offered a cash settlement within a month of their life being in danger, it’s really clear to us that they’re not in the right frame of mind to be making such a large financial decision when they’re still reeling from that near-death experience,” Financial Counselling Australia National Disaster Recovery Co-ordinator Vicki Staff said.