Consumer advocates have backed the corporate regulator’s push for improved cash settlement practices after a review found the payouts may result in unfair outcomes for home insurance claimants, especially after disasters.

They say the Australian Securities and Investments Commission probe confirms what they have seen over the years: cash settlements can leave homeowners worse off.

“Cash settlements are not a risk-free option for households,” Financial Rights Legal Centre external relations and advocacy principal Julia Davis said.

“Many people don’t realise that once they accept the payment, they may be responsible for any additional repair costs. At Financial Rights, we have seen lots of examples of cash settlement offers that were inadequate to repair all of the claimable damage.”

The ASIC review examined the use of cash settlements in home building insurance claims arising from Cyclone Jasper, and any updates made by insurers to their practices since then.

It found that in 52% of Jasper claims, insurers relied on a single builder-repairer quote to make their cash offers.

“While this can help expedite the claims process, insurers reported that 73% of claims involving one quote were from the insurers’ preferred supplier,” ASIC said.

“It is generally accepted practice for preferred suppliers to discount pricing for insurers in exchange for repeat business. However, if the consumer is not able to engage a supplier at that rate, the cash settlement may not be enough to cover the cost of repairs.”

ASIC says topping up cash payouts with a percentage added to builder quotes is an “effective way” to reduce the risk of consumers being left out of pocket.

But the probe found none of the five insurers examined (IAG, Suncorp, Allianz, QBE and Sure Insurance) had a consistent policy of applying such contingencies.

One insurer applied a 10% contingency to one claim but did not apply it to others. Another applied a 20% contingency after a consumer lodged a complaint.

In two instances where an insurer obtained more than one quote for repairs, it offered to settle on the lowest quote.

Consumer Action Law Centre assistant director Meg Dalling says with cash settlements part of most home insurance claims, transparency has never been more important.

“Without clear information about the risks, responsibilities and alternatives available, consumers can be left carrying unexpected costs and managing complex repairs themselves,” she said.

Financial Counselling Australia disaster recovery co-ordinator Louise Hayes says a cash settlement “can look like the quickest pathway forward after a disaster, but it can also transfer significant financial and practical risk from the insurer to the person who has just experienced the disaster”.

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From the latest Insurance News magazine: Why some stakeholders reckon insurers' redrafted code of practice falls 'far short' of what is needed to protect customers

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