Typically, for home building claims, a cash settlement payment is offered as a settlement option when a repairer can’t guarantee repairs due to concurrent wear & tear or maintenance issues.
Under paragraph 86 of the GI Code of Practice, insurers who have authorised repairs must accept responsibility for the quality of the builders work and the materials they use.
This clause has led to an unfair practice of offering cash payments as a first resort.
Most customers aren’t aware of their rights at law and under the GI Code, and simply accept the cash settlement offer. Problems arise when repair costs escalate (due to the rising cost of living or petrol cost increases and commensurate impact on supply chain) and the risks associated with project managing repairs.
The standard claims settlement process appears to be that whenever there is a mix of covered damage and damage caused due to wear and tear or lack of maintenance, there is a default to a cash settlement payment.
This position is difficult to reconcile when the same builder (under the guise of an expert report) has clearly been able to distinguish between storm damage and wear & tear/maintenance and provides a causation report.
Most consumers don’t want the inconvenience of having to arrange repairs, coordinate trades and generally project management the work.
A simple solution would be to provide the customer with the option of being provided with a detailed Scope of Works itemising insurance covered work and excluded work. The Code guarantee would be provided for the insurance covered work with the customer acknowledging their liability and payment for excluded work.
Regulatory view of cash settlements (and cash settlement fact sheets)
Cash settlements and cash settlement fact sheets (CSFS) remain on the radar of regulators.
ASIC
We will review general insurers’ use of cash settlements to better understand the practices and disclosures surrounding the offers being made and to assess whether there are risks of consumer harm. ASIC Corporate Plan 2025-2026
Code Governance Committee
As part of our 2024-25 workplan, we committed to reviewing the information insurers provided to customers on cash settlements and the processes they follow when deciding to offer a cash settlement.
We note that, in the Industry Action Plan, insurers have committed to a range of actions to address recommendations relating to cash settlements. We also note ASIC’s recent report, finding that insurers need to provide better information to consumers around cash settlements.
We will review what information insurers provide to customers, and what information those customers need to make effective decisions around cash settlements. CGC Priorities 2025-26
Cash Settlement Fact Sheets
An insurer, underwriting agency or TPA acting on behalf of either must provide a cash settlement fact sheet where:
- the financial service is claims handling and settling; and
- the service is offering to settle all or part of a claim under a general insurance product using a cash payment; and
- the customer is a retail client; and
- the PDS provides repair or replacement as settlement options.
The CSFS must be provided at the time of offer and include the prescribed content, at a minimum, in s948E-F Corporations Act) other than:
- where the insured event has given rise to an urgent financial need, in which a payment can be made up to $5,000 (and other criteria is met). The CSFS may be provided after the payment; or
- where there is a reasonable suspicion of family violence. In which case a CSFS does not need to be provided.
Cash settlements and contingency uplift fee
In July 2025, AFCA published a proposed Approach (for consultation) on AFCAs general insurance claims handling approach.
The section on Cash Settlements and contingency fee uplift is insightful and is included below in full.
2.3 Cash settlements in home claims
Failure to provide a fair offer would be a breach AFCA regularly deals with complaints about an insurer’s cash settlement offer. In doing so, AFCA carefully considers the basis of the insurer’s offer to determine if it is fair in all the circumstances.
As set out previously, the insurer’s claims handling obligations include making fair claim decisions that are supported by relevant information shared with the complainant.
Therefore, if an insurer is found to have provided an unfair or inadequate cash settlement, then AFCA will typically conclude the insurer has breached its claimshandling obligation.
Insurer must exercise discretion fairly
Often, an insurer has a discretion under the policy to either repair the damage, replace the item or pay the cost of either the repairs or replacement. However, this does not mean an insurer can unilaterally decide how to settle the claim.
When exercising a discretion under the policy, the insurer must do so fairly and consistently with the principles of utmost good faith.
So if the insurer decides to cash settle a claim, AFCA will assess whether its reasons for doing so are consistent with the above principles. If they were not, then AFCA can find that the insurer must settle the claim in a different way which is fair in the particular circumstances.
For example, an insurer may want to cash settle a large home building claim where the complainant is vulnerable and unlikely to be able to deal with or manage the repair process. This may not be fair because the logistics involved in the repairs are complex and overwhelming. At the same time, by cash settling, the insurer is not providing a lifetime guarantee for the works, and the risk passes to the complainant.
In such a situation, AFCA may decide to direct the insurer to complete the repairs.
The characteristics of a good cash settlement offer
If there is no dispute about the insurer’s decision to cash settle, or AFCA agrees that the insurer’s decision to cash settle is fair, then AFCA considers whether the cash settlement amount offered is fair.
Typically, these are the main things AFCA will consider in any cash settlement:
- the policy wording
- the scope of works any quote is based on the repair quotes
- the inclusion of any contingency (this is particularly important noting the transfer of risk)
- if the cash settlement includes all relevant benefits under the policy.
The scope of works is generally the most important factor. AFCA must be satisfied the scope of works fairly reflects the repairs necessary for the claim related damage. This includes whether it is consistent with the policy (e.g. to restore the property back to its condition when new, or identifies all claim related damage). To the extent the scope of works does not, then it is unlikely any quotation based on such a scope of works would be considered fair.
The next most important factor is the quotation itself. A fair quotation would typically:
- be based on a fair or established scope of works
- be detailed and itemised
- be actionable to the complainant in some way
- include a builder’s margin.
To the extent the quote does not, then it is less likely AFCA will consider the quote is fair.
In claims, particularly home insurance claims, it is relatively common for the final cost to be higher than the initial quotes. This is because as repairs commence, further issues or other costs get identified. In particular, the more complex or uncertain the extent of the works are, the more likely this may happen.
As a cash settlement transfers this risk to the complainant, AFCA will typically apply a contingency to any cash settlement that is based on a quote. This is to mitigate that risk as well as the fact the complainant would lose the guarantee of the works that are normally offered in the insurance work.
Such contingencies range between 5-25% but more typically sit between 10-20%.
Generally, the higher the risk of there being additional work or costs, the higher the contingency will be. In some unusual cases, AFCA may exceed 25% but this is rare.
It is also important that any cash settlement includes any other policy benefits. This may include benefits such as temporary accommodation, removal of debris and professional fees (amongst others). These benefits should be considered regardless of whether the complainant explicitly requests them or not, if the information shows they are likely to be applicable
General obligations of a Licensee providing claims handling services
AFS Licensees providing claims handling and settling services must provide their services efficiently, honestly and fairly. This general obligation applies to:
- the decision to offer a cash payment; and
- ensuring that the offer is fair and includes a contingency uplift for increased costs as repairs progress and the transfer of project management risk.
A breach of the general obligation is a reportable situation to ASIC.
Cash settlements as a last resort
Rather than being provided as a default settlement mechanism, cash settlements should be a settlement option of last resort and if offered, must include a contingency uplift fee recognising the transer of risk from insurer to consumer.
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