The cheque looks like the easy way out. House damaged, builders booked solid, materials on backorder, the client exhausted - and then the insurer offers a lump sum to walk away. Take the money, manage the repair yourself, close the file. Everyone moves on.
Except, increasingly, they don't. In a property claims environment squeezed by labour shortages, volatile material costs and a sharp rise in financial vulnerability complaints, the cash settlement has quietly become the path of least resistance for over-stretched claims teams - and a minefield for the property clients brokers are paid to protect.
Once the money changes hands, the homeowner is on their own: navigating a trade market they don't understand, exposed to under-scoped repairs, opportunistic operators and the very real risk that the settlement figure won't stretch to the work the house actually needs. And the consequences can outlast the disaster itself, feeding through to premiums years later when nobody is connecting the dots.
This time it isn't consumer advocates or regulators raising the alarm about this major insurance issue - it's the insurers and reinsurers themselves.
At this week’s Claims Leaders Summit in Sydney, Kate Middleton (pictured above with the two panellists), deputy chair of the Association of Insurance Building and Engineering Consultants (AiBEC) and head of commercial claims at ARC Projects, asked a panel of insurance leaders about this tricky issue. Middleton asked what is the real benefit the industry is missing by not leaning on a vetted supply chain and instead defaulting to cash settlements?
Justyn Ryder, head of claims and supply chain for Honey Insurance, did not sugar-coat the dynamic.
"Sometimes if you're running a claims business, you're getting pressurised about active claims and about backlog, it's really easy to cut and run and give cash and close the claim, because then that customer's done with,” he said.
Ryder warned that this is where the real damage can begin. With labour and materials volatility worsening, he questioned how an ordinary policyholder - for whom this is, in his words, "their first rodeo" -could possibly navigate the rebuild market alone. Unqualified tradespeople, sub-standard repairs and builders who quietly fold inside two years leave homeowners with "no leg to stand on." Stay inside the insurer's managed repair pathway, by contrast, and the client retains contractual protections, lifetime repair guarantees through panel suppliers, and - critically - the protections of the General Insurance Code of Practice (The Code) while the claim remains open.
The risk runs both ways. As Ryder pointed out, even insurers should be uneasy: once cash has changed hands, no one really knows whether the house has been put back together properly - and that same house may still be sitting on the insurer's book.
Janet Matcham, head of claims for Pinnacle Underwriting, reinforced the point, noting this is not solely a vulnerable-consumer issue. Commercial clients are equally exposed, sometimes taking the cash to self-manage repairs through their own networks. But in a market where temporary accommodation is scarce and trade capacity is stretched, the insurer-managed pathway acts, in her words, as a "step-up safety net" if unforeseen problems emerge mid-repair.
"It's where the insurers add the most value, I think,” said Matcham.
This is important intelligence for brokers advocating for property clients with serious damage claims. It comes on top of well-established cautionary advice from industry bodies and other stakeholders.
A cash settlement, AFCA has reminded the market, must be "fair in the circumstances" - but once accepted, it can end the insurer's obligations on that claim, leaving the client to absorb any shortfall if costs rise, scope creeps or hidden damage emerges. The Insurance Council of Australia (ICA) also warns policyholders the settlement may not cover full repair costs, particularly where market prices move or further damage is later discovered. Consumer group CHOICE cautions that once a full settlement is accepted, the existing policy may no longer be valid and another insurer may decline to cover a damaged property.
These are the lines of the conversation brokers need to be having before their client decides to agree to a cash settlement. Push for the scope of works in writing. Test whether benefits like temporary accommodation, debris removal and contents storage are being properly triggered and included. Insist on contingency loadings - Allianz's Brendan Dunne told a parliamentary inquiry the insurer applies 15% or 20% contingency where customers request cash settlement, anticipating inflation and delay.
There is also a longer tail to consider. As Middleton noted, under-reserving and rushed settlements have unintended consequences that surface years later - premium shocks that consumers struggle to connect back to an event three years in the rear-view mirror, but which reinsurers and underwriters are very much still pricing.
