Insurance Claim Underpaid? How to Challenge a Low Settlement

If your insurance claim has been underpaid, you can challenge the settlement by requesting the assessor's report, obtaining your own independent quote or valuation, and lodging an Internal Dispute Resolution (IDR) complaint with your insurer. If they won't increase the payout, escalate to AFCA for free. You are not required to accept the first offer, and accepting a partial payment does not prevent you from disputing the remaining amount.

Key takeaways

• You are not required to accept your insurer's first offer. You can negotiate or dispute the amount.
• Accepting a partial payment does not prevent you from disputing the remaining amount.
• Get your own independent quotes or valuations to counter the insurer's assessment.
• Lodge an IDR complaint, then escalate to AFCA if the insurer will not increase the payout.

Your insurer has accepted your claim. That should be the hard part over. But then the settlement offer arrives, and it barely covers half the damage. If your insurance claim has been underpaid, you are not alone, and you do not have to accept the first offer.

Underpayment is one of the most common insurance disputes in Australia. It happens when an insurer acknowledges your claim but offers less than what it actually costs to repair or replace what was damaged. The good news is that you have clear rights under Australian law, and there are well-established steps you can take to challenge a low settlement.

Your Insurer's Obligation to Restore You

Under section 57 of the Insurance Contracts Act 1984 (Cth), when an insurer agrees to pay a claim, the payment must be sufficient to put you back in the position you were in immediately before the loss occurred. This is known as the "indemnity principle," and it is the foundation of every home and contents insurance policy in Australia.

The General Insurance Code of Practice reinforces this obligation. Insurers must handle claims efficiently, honestly, and fairly. When an insurer's settlement offer falls short of what is genuinely needed to restore your property, they may not be meeting these requirements.

Understanding Your Policy Type

New-for-Old vs Indemnity Cover

The type of cover you hold makes a significant difference to what you are entitled to receive.

New-for-old (or replacement) policies pay the cost of replacing damaged items with new ones of similar kind and quality, without deducting for age or wear. If your five-year-old carpet is destroyed, a new-for-old policy should cover the cost of new carpet of a similar standard.

Indemnity policies, on the other hand, account for depreciation. Under indemnity cover, that same five-year-old carpet would be valued at its current worth, not the cost of a brand-new replacement. The payout reflects the item's age and condition at the time of loss.

Check your policy's product disclosure statement (PDS) carefully. Many homeowners hold new-for-old cover without realising it, which means they may be entitled to more than the insurer has offered.

Cash Settlement vs Managed Repair

When your insurer approves a claim for property damage, they will typically offer one of two options: a managed repair, where the insurer arranges and pays contractors directly, or a cash settlement, where they pay you a lump sum and you organise the repairs yourself.

Cash settlements can be convenient, but they come with risks. Insurers sometimes calculate cash settlements based on their bulk-contracted rates with preferred builders, which can be significantly lower than what an independent tradesperson would charge on the open market. If you accept a cash settlement that does not cover the true cost of repairs, you may be left out of pocket.

If you are offered a cash settlement, get your own independent quotes before agreeing. You are entitled to know how the insurer calculated the amount, and you can challenge it if the figure does not reflect the real cost of restoring your property.

Challenging the Insurer's Scope of Works

The scope of works is the insurer's list of what they believe needs to be repaired or replaced. Disputes over the scope of works are extremely common. An insurer's assessor might determine that only part of a damaged room needs repainting, for example, when in reality the entire room needs to be done to achieve a proper colour match and finish.

Here is how to challenge an inadequate scope of works:

• Request the insurer's scope of works in writing. You are entitled to see exactly what they have assessed and costed.
• Get independent quotes from licensed tradespeople. Ask them to inspect the damage and provide their own scope of works with itemised costings.
• Document everything. Take photos and videos of all damage, including areas the insurer's assessor may have overlooked.
• Compare the two scopes item by item. Identify specific areas where the insurer has underestimated the work required or used below-market rates.
• Put your challenge in writing. Send a clear, detailed letter to your insurer explaining where their scope falls short, supported by your independent quotes and evidence.

Your insurer is required to respond to your dispute within specific timeframes. Under ASIC Regulatory Guide 271 they must acknowledge your complaint within one business day, and under paragraph 147 of the General Insurance Code of Practice they must provide a final response within 30 calendar days. Paragraph 146 also requires them to update you on progress at least every 10 business days.

Steps to Dispute an Underpayment

Internal Dispute Resolution (IDR)

The first step in challenging an underpaid claim is to lodge a formal complaint through your insurer's internal dispute resolution process. Every insurer in Australia is required to have an IDR process under ASIC Regulatory Guide 271.

When lodging your complaint, be specific. State the claim number, the amount offered, the amount you believe is fair, and why. Attach your independent quotes, photos, and any other supporting evidence. Keep copies of everything you send.

Your insurer must provide a written response to your IDR complaint. If they maintain their original offer, they are required to inform you of your right to escalate the matter to the Australian Financial Complaints Authority (AFCA).

Escalating to AFCA

If your insurer's IDR process does not resolve the dispute to your satisfaction, you can lodge a complaint with AFCA free of charge. AFCA is an independent external dispute resolution scheme that covers all general insurance complaints in Australia.

AFCA has the power to make binding decisions on insurers. They can order an insurer to pay additional amounts if they find the original settlement was inadequate. There is no cost to you for using AFCA's services, and you do not need a lawyer.

To lodge an AFCA complaint, you will need your insurer's final IDR response (or evidence that 30 days have passed without one), details of your claim, and a clear statement of the outcome you are seeking. AFCA will review the evidence from both sides and work towards a fair resolution.

The time limit for lodging an AFCA complaint is generally two years from the date of the insurer's IDR response, but it is best to act promptly while the evidence is fresh and repair costs have not changed.

How The Fair Claims Co Can Help

Challenging an underpaid insurance claim takes time, attention to detail, and a solid understanding of your policy and your rights. The Fair Claims Co specialises in preparing the documents you need to dispute an unfair settlement. From detailed complaint letters for your insurer's IDR process to comprehensive AFCA submissions, we help you build a strong, evidence-based case.

If your claim has been underpaid and you are not sure where to start, visit fairclaims.com.au to learn more about our document preparation services.

If you have already accepted a payout and later realised it was too low, you may still have options. Our guide on disputing an insurance claim after accepting a payout explains your rights under Australian law.