Home insurance cash payouts may leave some people out of pocket, Which? warns

Insurance customers are being warned by Which? to carefully weigh up potential cash settlements, amid concerns some offers may not be in their best interests.

When resolving a claim, insurers may offer to repair or replace losses itself, a cash settlement, or a combination of the two.

Research for Which? involving more than 2,800 people who made a home insurance claim in the past two years found that among the claims partly or fully accepted, around two-fifths (41%) were granted a direct repair or replacement, two-fifths (38%) were offered a cash settlement, and one fifth (19%) were offered a combination of both. The remainder selected “other” or “don’t know”.

While accepting a cash payout can seem like a fast solution, in some cases claimants can risk being left out of pocket in the long run, Which? cautioned.

For example, if a house has been damaged and needs extensive repairs, the full restoration costs may only become apparent when work is under way.

Some people may end up partially relying on their own funds to put damage right.

The consumer group raised concerns that rapidly rising costs for many trades could mean consumers underestimate the full price of repair work.

It is also concerned about the potential for cash settlements to reflect discounted rates from an insurer’s suppliers and contractors that would not be available to customers.

Earlier this week, Which? launched a super-complaint about the home and travel insurance markets.

The super-complaint, being made to the Financial Conduct Authority, is about the markets as a whole, not specific firms.

Over the past year, Which?’s “end the insurance rip-off” campaigning work has produced research reports which the consumer group said exposes poor customer experiences – including consumer confusion over what is covered by a policy, and “frustrating and substandard treatment” when people claim.

Sam Richardson, deputy editor of Which? Money, said: “When you’re vulnerable, perhaps in the wake of a distressing event like a burglary or when dealing with the fallout from a fire or flood, it can be easy to accept the first offer your insurer makes – but it’s important to weigh if this will be in your longer term interests.”

Deltapoll carried out research among home insurance customers for Which? in June and July.

A spokesperson for the Association of British Insurers said: “Insurers want to support their customers – especially those in vulnerable circumstances – as best they can.

“A cash settlement may be offered to provide a customer with flexibility and control over repairs or replacements, always in consultation with the customer and with their consent.

“We’re already working with the regulator regarding its concerns over cash settlements to identify improvements that can be made.”

Here are some tips from Which? for people offered a cash settlement to resolve an insurance claim:

1. Check what your policy wording says your options are when offered a cash settlement – and ask your insurer about alternatives.

2. Ask for a cost breakdown. Consider whether you will be able to restore possessions to the same standard as before and whether the costs are based on any discounted rates that you cannot access.

3. If managing repairs yourself feels overwhelming, let your insurer know. It should take this into account and provide extra help.

4. If you feel your insurer is forcing you to accept a settlement that you believe is unfair, make a formal complaint to the insurer. If you are not satisfied with the outcome of your complaint, consider escalating it to the Financial Ombudsman Service.