About half of Victoria’s 79 municipal councils have been put on notice for using contractors to manage small property damage and injury compensation claims.

A Victorian Ombudsman report – Outsourcing Small Claims Handling: How Councils Manage Fairness and Responsibility – focuses on claims that fall below insurance policy excesses.

It calls on councils to ensure contracts with small claims handlers balance financial sustainability with the needs of claimants, and to advise that decisions can be reviewed.

While councils have insurance for larger claims relating to negligence, below-excess matters bypass insurers.

The report says excesses vary between councils but the highest it identified was $50,000.

The ombudsman received 650 complaints about local council compensation and damages matters between January 2022 and June last year.

“These were not just under-excess claims,” the report says. “The claims handlers we investigated told us they handled about 8000 council under-excess claims in this period.”

Many claims that led to complaints involved injuries caused by falls on uneven footpaths, vehicles and bikes being damaged by potholes, and damage caused by trees.

Disgruntled ratepayers complained about the handling of their claims and lack of communication.

The report says about half of councils handle under-excess claims in-house, while the rest use external contractors for various staffing and expertise reasons.

Councils decide whether to accept claims and self-fund any payments.

According to the report, under-excess claims handlers the ombudsman questioned have extensive experience in the insurance industry.

“Despite administering claims, under-excess claims handlers are not required to be registered insurance companies.

“This means they are not usually regulated by the Australian Securities and Investments Commission and are not required to hold an Australian financial services licence unless they are part of an insurance business.”

Ombudsman Marlo Baragwanath says councils cannot outsource their responsibility to treat people fairly.

“The community expects that councils make decisions fairly and on the merits, and that they provide a fair and effective process for community members to seek review of a decision,” she said.

“Some councils presented small claims handlers as independent, without making clear that they are contracted by the council.

“Across the councils we examined, we saw examples of good practice and opportunities for fairer processes. The difference really came down to how well councils provided oversight of the small claims handlers they engaged.”