Cash settlements could be a focus for the code of practice review, the parliamentary inquiry into the 2002 floods has heard, as insurers face criticism for underpayments and pressuring vulnerable consumers.

The inquiry has heard proposals for more oversight of cash payments, including through the code, directing people to gain legal advice and improving the wording on required fact sheets, which were introduced just before the record floods.

Inquiry committee Chairman Daniel Mulino said while cash settlements are sometimes appropriate, the hearings have been told of issues with people accepting the money and taking on the risk and responsibility.

“This may not be the majority of cases, but there’s certainly an assertion that, in some cases, people do it out of exhaustion or pressure,” Dr Mulino said. “There are question marks over whether regulatory guard rails at the moment are quite sufficient.” 

Independent MP Andrew Gee suggested to Youi executives that clause 79 of the code of practice should be strengthened. The clause says: “If we offer a cash settlement under a home building policy, we will provide you with information to help you understand how they work and how decisions are made on cash settlements.” 

Mr Gee said: “A clause like that, given the importance of cash settlements and their ramifications, is not really adequate enough to protect consumers is it.”

Youi COO Bert Bakker said: “I think it can be enhanced, clause 79.” He told the committee that where cash settlements are made, policyholders are told that “if the scope wasn’t sufficient, they are welcome to come back to us”. 

Australian Securities and Investments Commission Senior Executive Leader of Credit Banking and General Insurance Nathan Bourne said issues such as inadequate time frames for people to get back to an insurer if the payment is not enough could be considered in the code update. 

“The cash settlement process and time frames are things that would fit into, I think, the code review process, because there are some provisions in there, and that may be an important method of looking at the time frames that insurers have and are providing to consumers in this space,” he said. 

Insurers have rejected suggestions they incentivise staff to cash settle, and say they prefer to oversee repairs themselves. 

Circumstances in which cash payments are made include emergency payments, when sums insured are less than repair costs, when there is existing damage that needs to be fixed or other issues with a particular property, and when a policyholder chooses that option. 

An Insurance Council of Australia spokesperson told insuranceNEWS.com.au the industry body does not collect data on cash settlements as a proportion of overall claims. 

Some issues around cash settlements were raised in an Insurance Council-commissioned Deloitte review. 

“An independent review of the 2020 General Insurance Code of Practice is currently under way, with phase two of the review considering opportunities for improvement from the 2022 floods and the inquiry. This might cover cash settlements,” the spokesperson said. 

Allianz Australia Chief Customer and Operations Officer Brendan Dunne told the inquiry a buffer is provided with cash payments. 

“Sometimes we have no choice to cash settle because the sum insured has been fully used, but in cases where that is not the case and a customer does want to cash settle, we put contingency payments up to 15, 20% on there because we know that there will be inflation, time, and delays,” he said. 

Financial Counselling Victoria Disaster Recovery Co-ordinator Tracey Blythe told the inquiry of “forced cash settlements against the customer’s preference for an insurance rebuild seemingly becoming more routine over time”. 

Counsellors pointed to cash offers being raised significantly only after advocates became involved, with the sum increased from $167,000 to $568,000 in one case. Insurers were accused of bonus structures that favour cash settling, and of pressuring vulnerable people. 

“If someone has been rescued from their roof and are then being offered a cash settlement within a month of their life being in danger, it’s really clear to us that they’re not in the right frame of mind to be making such a large financial decision when they’re still reeling from that near-death experience,” Financial Counselling Australia National Disaster Recovery Co-ordinator Vicki Staff said. 

IAG CEO Nick Hawkins and Suncorp CEO Steve Johnston rejected suggestions of bonuses that incentivise cash settlements and said their companies’ preference was to complete repairs themselves. 

IAG and Suncorp were unable to provide details on the proportion of cash settlements they make when asked by insuranceNEWS.com.au, but highlighted a focus on supporting customers when that path is taken for various reasons.

“When a customer chooses to use their own builder and would like to receive a cash settlement for damage, we work with our customer and their builder to ensure that the settlement amount covers the full costs associated with the insurance-related repairs,” IAG EGM Claims Luke Gallagher said. 

Suncorp notes that typically after a significant natural disaster it sees customers choosing a full or partial cash settlement for policy benefits such as temporary accommodation and emergency cash payments. 

“We remain supportive of all efforts to improve understanding of the cash settlement process, as we want to help customers make the best decision for their circumstances,” a spokesman told insuranceNEWS.com.au.