Home insurance customers short-changed by meagre payouts

In the year to April 2023, the Financial Ombudsman Service (FOS) saw an 11% rise in complaints about the value of buildings insurance claims.

When you make a claim on your home insurance, you'd expect the insurer to pay as much as it takes to fix the problem.

But we've heard of insurers offering inadequate settlements, leaving customers to cover the shortfall – sometimes tens of thousands of pounds.

Here we investigate how customers can lose out when dealing with more powerful and informed insurers, and explain how you can fight your corner.

This is the third and final article in our series on the deep-rooted problems with home insurance, also looking at claims being declined and claims delays. 

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Offered £60,000 for £250,000 in damage

Between May and September, we spoke with 10 claimants in ongoing claims disputes with insurers, and also to 10 claims professionals.

Most of the claims experts we spoke with flagged inadequate cash settlements as a major issue. Most were loss assessors – claims experts that you can hire to advocate for you in a claim. 

Some – such as Imran Ramzan – worked as loss adjusters (specialists contracted by insurers to evaluate claims) prior to becoming loss assessors.

Ramzan described one case where a five-bedroom detached house had been flooded. 'The insurers offered £60,000 to settle the whole claim,' he told us. 'We found that the amount was grossly inadequate.' 

'Unknown to the policyholder, the flooding had caused structural damage to the property which would have become his problem had he accepted settlement. The insurers were fully aware of this possibility but at no point did they instruct engineers to investigate this further – which they should have done.'

Ramzan tells us that his firm, Artayga, was able to push the settlement up to £250,000. 

For five of the claimants we spoke to, differences in opinion around appropriate settlement amounts formed a key, ongoing part of the dispute. 

The scales ranged from tens of pounds (such as for the replacement of shoes or clothes) to tens of thousands when it came to the costing of significant building construction and remediation work. We were shown one email exchange in which a final cash settlement was negotiated upwards by more than £40,000.

• Find out more: the best home insurers for claims

Caught out by cash settlements

Cash settlements are at the root of many disagreements between home insurers and customers.

If you make a home insurance claim and it's accepted, your insurer will settle it by arranging to repair or replace your losses and/or paying you cash. 

For example, after a flood, the insurer might arrange for contractors to dry out and restore your home, while paying you money to live in alternative accommodation.

If your insurer chooses to provide a cash settlement, the amount it offers should be fair – reasonably reflecting the costs to you of getting back to the situation you were in before the claim.

However, if you're given the choice of a cash settlement or for the insurer to arrange repairs – and you choose cash – the insurer only has to offer you what it would have paid to do the work itself. This is likely to be less than what you'd be billed, as insurers typically benefit from discounted rates from the suppliers and contractors they work with.

It's possible that customers accept a cash offer, only to later discover it didn't meet their costs.

With claims taking months or years to resolve, it's possible that the rising cost of contractors and materials will mean the original settlement isn't enough.

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Worst offenders for claims valuation disputes

The companies in this table have the highest Financial Ombudsman Service (FOS) uphold rates when it comes to buildings insurance complaints involving the value of the claim.

We contacted each insurer about their FOS statistics. Of the companies in this table, Fairmead was the only one to provide specific comment about claims value disputes in its response. It told us that it always provides a degree of flexibility in its settlements to help ensure it provides the right outcome to its customers. 

'We will look to validate all of our claims and consider what is fair and reasonable in terms of the settlement,' a spokesperson explained. 'We've invested heavily in ensuring that all of our claims staff understand our customers and what's both important to them but also what's available to them and actively look to have open conversations around what they are covered for. 

'This helps with both agreeing what our settlement should be but also educating customers on what we consider and how we approach settlements to help manage expectations on any future claims they may need to make.'

Vulnerable customers

Insurers and their representatives have distinct advantages over consumers when it comes to negotiating cash settlements.

If the claim is complex, you may struggle to check your insurer's homework. Even if you have the expertise, you may not have the energy for protracted negotiations or be able to afford the delays these cause if your home is a building site. 

For this reason, some customers we spoke with were hesitant to negotiate, complain or go to the FOS – sometimes giving in and taking what was on offer – even if it left them short-changed.

Grant Williams – another loss adjuster turned loss assessor – told us his company, Oakleafe, has seen an increase in 'clients asking us for help as the cash settlement offer is too low and they're being bullied into accepting it'.

Vulnerable customers are probably the group least well-positioned for a grudge match over insurance contract smallprint and the details of complex construction work.

By the FCA's definitions, vulnerable customers are those who experience one or more of: poor health, low capability, recent negative life events and low financial resilience. They're not a niche group – it estimates that 47% of the UK population shows one or more characteristics of vulnerability. If your home has just been wrecked, your likelihood of being vulnerable is probably even higher.

This summer,  following a review of the market, the FCA issued a warning to home and car insurers – telling them that they must improve their treatment of vulnerable customers and how they handle claims. 

It noted that there was 'much more to be done on the identification of vulnerable customers', finding that some insurers couldn't show how they effectively identified vulnerable customers, meaning some could be losing out.

Customers shouldn't be treated as a nuisance

Dean Sobers, Which? insurance expert, says:

'There are undoubtedly plenty of examples of good practice to hold up against those we've explored in our investigation examining home insurance issues – and it's important to note that our annual home insurance surveys suggest the majority of claims are dealt with reasonably. 

'However, damning industry statistics – from too-low claims acceptance rates to rising volumes of complaints – can't be dismissed, or explained away by challenges caused by the pandemic, climate change or inflation. 

'It's absolutely unacceptable that some paying customers – recovering from awful events and struggling to put their lives back together – come to feel like their insurer regards them as little more than a liability or a nuisance.

'We pay our premiums for peace of mind. The industry needs to seriously examine whether it can deliver.'

How to complain to your insurer

If you feel your insurer is treating you unfairly, your best first course of action is to write to it and complain. 

It must respond to your complaint within eight weeks – and if this doesn't resolve matters to your satisfaction, you then have the further recourse of the Financial Ombudsman Service.

When we spoke to the FOS about the rises in complaints it has seen, a spokesperson told us: 

'When major issues arise with your home we know it can be incredibly stressful. We’ve seen an increase in buildings insurance complaints over the last year – and these have been driven by declined claims, claim delays as well as disputes over the value of a claim. 

'If consumers don't feel they've been treated fairly by their insurer, they should contact our free, independent service and we'll investigate their complaint. Each case is investigated on its own merits.'

For more on navigating the sometimes tricky landscape of making an insurance claim, see our guide to home insurance claims. It's packed with tips and our unique rankings of insurers' claims services, based on feedback from claimants.

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