Insurers must make a decision on a claim within four months, although a “simple claim that is plainly covered” should take less time to accept, the Australian Financial Complaints Authority says.

A new claims handling guide includes six case studies to help clarify how AFCA approaches complaint decisions.

“There is no standard formula as to what constitutes a reasonable time or how exactly a claim is handled fairly,” it says. “This will depend on the specific circumstances of the claim and the conduct of the parties.”

In one case, an insurer authorised cyclone damage repairs for about $100,000, but work had not started more than 18 months later, when the builder revised the cost to $680,000 due to new building codes.

The insurer tried to rely on a $30,000 policy limit for code compliance, but AFCA ordered settlement for the full cost of repairs, plus $6300 compensation for stress as the claimant lived in the damaged property for several years.

In another case, an insurer’s builder did not safely remove asbestos, contaminating an entire home, and the insurer failed to record that the property owner – who was accused of assaulting the builder – had a medical condition that made it difficult for him to deal with people.

“The complainant had reasonable grounds to be frustrated due to the poor claim handling. The AFCA panel did not consider it was fair in the circumstances to cash settle.”

The ombudsman says it can award costs such as accommodation beyond policy limits, and claim decision information, including unredacted costings, must be shared with a complainant.

Investigation of claims must be done “reasonably and expeditiously”.

Complaints about cash settlements are frequent and these offers should “not be a first option”, the guide says. Policy discretion to either repair, replace or pay costs “does not mean an insurer can unilaterally decide how to settle the claim. 

“An insurer may want to cash settle a large home building claim where the complainant is vulnerable ... This may not be fair because the logistics involved in the repairs are complex and overwhelming. By cash settling, the insurer is not providing a guarantee for the works, and the risk passes to the complainant.”

AFCA says the scope of works is generally the most important factor when assessing fairness, and should include materials and labour; all the work needed; whether accommodation is needed; an estimate of the time required; steps taken to secure the property and possessions; and a direct contact.

An insurer undertaking repairs requires good communication, a flexible claims handling process and fair decisions.

“If the insurer decides to cash settle a claim, AFCA will assess whether its reasons for doing so are consistent with the principles of utmost good faith,” the guide says.

“Failure to meet any of the above may result in AFCA finding the insurer has failed to handle the claim reasonably.”

AFCA also has new guides for non-financial loss and uninsured motorist complaints here.