Bank acted reasonably in use of insurance payout

Insurance policies,
Colm was the director of a company that took out a bank loan to buy a rental property. The company granted the bank a mortgage over the property to secure the loan. Flooding forced the tenants to move out, and the company lodged an insurance claim. Several months later, the insurance company paid $60,000 to cover the cost of repairing the damage.
January 2020

After completing the repairs, Colm complained about the bank’s policy for disbursing the insurance money. The bank only allowed him access to the money when he provided invoices. Further, the bank would not allow him to use the insurance money to pay rates on the property or for expenses not associated with the repairs. Colm said he should have been free to manage the repairs without the bank’s interference, and that the bank’s policy had caused an eight-month delay in completing the work.  

Colm sought compensation for lost rent, but the bank declined his request and Colm asked us to investigate.

Our investigation

The Property Law Act 2007 states that it is an implied term of every mortgage that if any buildings or improvements on mortgaged land are destroyed or damaged, any insurance monies received are to be applied, at the option of the mortgagee, towards either repair or payment towards the loan. In this case, the bank elected to allow the insurance proceeds to be used to repair the property. 

In circumstances where the damage to secured property is significant and the repairs are to be managed by the property owner, the bank’s general process was to agree on the scope of repairs, confirm the costs, and allow draw downs of the insurance money on presentation of invoices. The purpose of the policy was to ensure the value of the bank’s security was maintained as far as possible while repairs are being completed. 

We noted the bank had a legitimate interest in ensuring the value of its security was protected through the repair process and to ensure the funds were used for the repairs. Further, the bank’s policies were in line with standard industry practice. We found the bank paid repair bills promptly once they were presented.

We considered the bank had adequately explained its processes for managing the insurance payments.  However, we believed the bank could have given Colm a more comprehensive explanation of the reasons for its policies and processes. In our view, many people would be unaware of the processes that apply with insurance payouts and would assume that if the insurer had paid the claim, the funds were theirs to manage.  In light of this, we recommended the bank review the information it gives to customers in this situation. 


Colm withdrew his complaint. The bank accepted our recommendation. 

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