Vulnerable homeowners have won a housefire claim dispute and financial compensation after an ombudsman ruled their 30-year-old son, living with them for five months to rehabilitate from methamphetamine use, was not "family" for the purposes of a policy exclusion “irrespective of whether or not he caused the damage”.

IAG paid for temporary accommodation on an ex-gratia basis but declined the claim on the basis the son was living there permanently and the fire, which took place in April and caused total loss of the building and contents, was caused intentionally by him.

The Australian Financial Complaints Authority (AFCA) ruled IAG should pay the claim “urgently”, as well as $3000 compensation. It is not to apply the policy’s $20,000 temporary accommodation benefit limit and must pay for any additional items such as removal of debris and counselling.

AFCA also ruled the policyholder should have the option of how she would like the claim to be settled - cash settlement within seven days or having IAG “expeditiously” carry out repairs – even though the policy terms allowed IAG to decide how to settle a claim.

“That is because, having regard to the age and physical and mental health of the complainant and her husband, it is highly unlikely that she would be able to cope with or manage the extensive repair process herself, with all that entails,” the ruling said.

The woman, aged in her 70s, and her husband were described by their broker as "highly vulnerable". The man was in hospital for serious surgery at the time of the fire and remained unwell.

They were homeless and experiencing severe financial consequences as a result of the delay in having the claim settled “as it should have been,” AFCA said, and were now having to consider selling the land and damaged house, and the woman was being treated for anxiety and depression.

Police said her son had been taken into custody because they thought he might have started the fire and the police forensics team said the blaze had started in her son’s room, and asked her about any electrical items, particularly a portable air conditioning unit which was in the room.

It was believed the son, who was known to police due to his drug use, was charged, although the matter has not been heard in court and there is no conviction for arson or any other offence.

A few months earlier, someone known to him was seen ranting in front of the house, returning two nights later and burning a car and violently damaging the property, having said her son owed him money. IAG’s loss adjuster confirmed there were scorch marks on the road directly in front of the house.

After the April fire, local media reported police had been called to a disturbance at the property and shortly afterwards the house was engulfed in flames.

“That raises the possibility that a third party may have been involved in the fire event,” AFCA said.

It ruled IAG could not rely on an exclusion for damage caused intentionally by a member of the "family" since the son was not family for the purposes of the policy, defined as someone “who lives permanently with you”.

“The insurer has not met its onus of establishing, on the balance of probabilities, the application of any exclusion,” the ruling said.

“It is therefore not necessary to decide whether or not the son caused the damage intentionally (or at all).”

AFCA said it was reasonable to regard the insured house as an interim residence while the son dealt with his issues, with the help of his parents, and considered his next steps. As IAG’s policy did not define "permanent", the dictionary meaning of "lasting or intended to last indefinitely; remaining unchanged; not temporary" should apply.

“He had been living there for about five months when the fire occurred and there was no specific time-frame for him to move out at that stage. However, that is not an unreasonable period given the situation: namely, the son’s mental health issues and the need to re-establish himself after a relationship breakdown,” AFCA said.

There were also no clear arrangements in place for the son to share responsibility for household costs which AFCA said might “reasonably be expected in a permanent arrangement”.

“The complainant allowed her adult child to return to stay in her home after a change in his personal circumstances, which is an understandable response. However, that does not automatically mean that house then became his permanent home,” AFCA said.

While her husband was in hospital, the policyholder left the property on the morning of the fire, April 1.

Police called her to say a neighbour across the road had CCTV footage which showed her son leaving the property and walking up a hill. She was only able to make contact with her son days later, and he said he did not start the fire.

She stated her son was very particular about his room and personal belongings which he spent some money on, was fastidious about everything, including a valuable stamp collection he lost in the fire, and he loved the dogs and would not leave them in a burning house.

Two weeks before the fire event, she had called an ambulance, and police attended, as he was “talking to people who did not exist”. She believed her son was supposed to be on medication but was not taking it

“The son has an unfortunate history of mental illness with periods of hallucination and substance abuse, as well as contact with the police and mental health services,” AFCA said. “He had been showing signs of being unwell in the period leading up to the fire event, which raises questions about his mental capacity”.

AFCA said while the eventual court judgment would likely be relevant to the son’s intention - and IAG’s consideration of its position - and sometimes it may be “fair to await the findings of the court before AFCA issued a determination”, in this matter the evidence “did not establish the son lit the fire and caused the damage intentionally, if at all”.

“However, that is not decisive for the purposes of this claim and complaint. Nor is the outcome of the proposed court proceedings,” AFCA said.

“That is because, regardless of the issue of intention, the exclusion on which the insurer seeks to rely to decline the claim does not apply because the son was not living permanently at the insured property.”

See the full ruling here.