Here are some pointers for those who are considering (or being forced to consider) how to go about cash settling an insurance claim. How you respond to this will depend on your personal circumstances, but there are some questions and concerns that need to be addressed:
Can my insurer insist on a cash settlement? Most policies do have a clause which states that the insurer is entitled to pay the cash equivalent of the cost of the repairs or rebuild. Therefore in many cases the insurer can make an election to cash settle. However there are a number of other points:
• If an insurer has previously made a clear and apparently final election to repair or rebuild then cannot simply change course and can usually be held to its original choice.
• It is arguable that if the insurer was to have paid cash it should have done it two or three years ago and now it should see the repair / rebuild through.
• The insurer must act in good faith. The fact that the insurer has its own internal timeline that is self imposed is not a good reason to force a cash settlement.
• Do not accept pressure from insurers to sign build contracts or the like with the threat that otherwise they will pay cash. That is not in good faith, and if they have elected to repair / rebuild they cannot arbitrarily change their mind.
Can my insurer insist that I sign a full and final settlement agreement? The short answer is “no”. There may be reasons that you might want to (finality for you, ability to use the money in a different way etc.) however there is no obligation to sign an agreement which states that you accept that the claim is finally settled. This is especially important if you are actually going to undertake a repair or rebuild as the effect of this is to shift all of the risk to you – such as additional damage, increased costs, or unexpected building conditions.
So in what circumstances should I sign a full and final agreement? There are cases when it might be in your best interests to sign a full and final settlement agreement. Most likely this will be the case where you want to do something different with the insurance proceeds. This might include:
• Rebuilding an entirely different house;
• Waiting before repairing or reinstating;
• Buying two properties rather than one with the proceeds (lucky you);
or any number of other options which are not captured by the policy terms. However you do need to take into account the wording of the settlement agreement when choosing what to do. In most cases it is better to use the words “reinstate” rather than “rebuild” or “replace” in the agreement as it is more generic and captures more possibilities.
What can I spend the cash on? The general rule is that you must spend insurance proceeds on reinstatement – and in most cases where a “full and final” agreement’s signed it will be a term of that agreement that the money will be spent in accordance with this rule.
How does a cash settlement work if it is not full and final? Most insurance policies provide that the insurer may “pay the cash equivalent of the cost of the rebuild or repair” or something along those lines – however to understand it properly you should refer to your own policy wording. Where this is the case the insurer is obliged to meet the costs of the reinstatement as they arise. A recent case indicates that the insurer should pay you an advance on the cost of reinstatement (the case is East v Medical Assurance Society and it says that the insurers cost estimate should be paid as a pre construction payment). So if you intend to simply repair or rebuild on the basis of what you had then the better option may be to simply proceed along this path.
If I settle full and finally do I have to accept the insurer’s estimate of costs? No. Whether you are settling for cash on a full and final basis, or on an ongoing repair rebuild basis you do not have to accept the insurer’s costings. If you are settling on a full and final basis any costings will be estimates and therefore hypothetical. You should however be confident that any costings capture all of the damage, properly identity the costs of remediation (in terms of repair methods, materials used, building requirements, and wider costs such as consenting and design) and also the prices used are in keeping with the actual market.
Unless you are very comfortable with the offered settlement it is wise to take independent advice on these matters. The kind of professionals you might use are:
• An engineer or building surveyor (to assess the extent of damage and required / scope of repair)
• A lawyer (to give advice on the proper standard of repair and policy coverage)
• A quantity surveyor (to cost the scoped repair)
If the insurer is paying the cost of the repair / rebuild do I have to accept their estimate of costs? If you are settling, but not fully and finally, and the insurer accepts an obligation to meet ongoing costs you do not have to accept their approach. Insurers often seek to constrain a number of things including cost, design, appointed professionals and so on. By electing to cash settle the insurer has chosen not to manage the repair or rebuild but rather to pay the cash equivalent of the reasonable costs of reinstating in accordance with the policy (in fact in some policies this is the only thing the insurer can do). Where this is the case the insurer must agree to the reasonable costs – and the fact that it is different from the way in which they would reinstate is not a reason to refuse providing it is reasonable. This can lead to conflict with insurers and obviously it is best to get agreement in advance as to the methods, design and expected costs – but an insurer cannot insist that their preferred method / scope etc. be followed. This would amount to them controlling the project and by cash settling they have elected not to do this.
If I am fully and finally cash settling what kind of items should I look out for? If you are going to fully and finally settle your insurance claim you need to be sure that you are getting a fair settlement that reflects as closely as possible your entitlement under the policy. Here are a few things that you might want to consider:
• Is the insurer using equivalent “modern materials and methods”. Often insurers assume that you will be happy with materials which are in common use but are not equivalent to what you had. Consider if things like the following are being properly costed for replacement (if you had them before):
o Wooden and not MDF skirting and architraves (and hardwood if they were previously exposed and not painted);
o Solid wood and not hollow doors;
o Wooden and not aluminium windows;
o Permanent material cladding / roofing as opposed to linea / steel;
o Detailed design of a rebuild (such as replicating the original floor plan) rather than an off the plan build (or “group” build);
o As close as possible heat sources (such as gas for open fires);
• Is the insurer paying reasonable costs of design – if the home was architecturally designed this will generally require an architect. Even if it was not , be cautious of the insurer allowing simply for drafting without an allowance for detailed design work;
• Are there other professional costs – this could include surveying and engineering;
• Does the cost correctly capture any regulatory upgrades needed such as insulation, double glazing, enhanced foundations etc.;
• Are project management fees included. You should not be expected to project manage the repair or rebuild. This is an expert task that requires a professional.
• Does the amount include a contingency or risk allowance for unforeseen matters? Builders will always provide for a contingency whether in a fixed price contract or in an estimate. Any final cash settlement needs to allow for the likelihood of unforeseen expenses.
• Are consenting fees at Council included. This can be quite costly, especially if there are non standard designs such as site specific foundations;
• If any items are excluded due pre existing damage or defects (rot, weather tightness issues etc.) are these correctly identified as items undamaged by the earthquakes and therefore not the liability of the insurer.
Final Comments It is easy to get into conflict with an insurer over cash settlements and the fact is that there will never be absolute agreement on every item. In many cases a cash settlement (final or not) is a real benefit to a homeowner who can take control of their insurance issues and make their own decisions in their own time. It is best to take a practical and pragmatic approach, while being firm with the insurer and letting them know that you are aware of your rights. If the insurer takes an arrogant or domineering approach it is wise to get help either from a community agency (like RAS) or a professional (like and insurance advocate or lawyer).
Other resources added by Sarah: