Customer mistakenly believed she could control payout of insurance money

Categories:

Service channel, Instructions not followed, Lending,

Summary:

Loretta and her mother jointly owned a house, which acted as security for their home loan with the bank. In early 2023, the property was damaged by flooding. Loretta made a claim with her insurance company, and in the meantime she began funding repairs herself. A few months later, Loretta's mother died, leaving her unable to afford the loan repayments. The bank agreed to a one-year mortgage holiday.

Published:

August 2025

In June 2024, the insurance company paid out $125,000. The money went to the bank because it had a security interest over the property. Loretta had expected to receive the money herself, believing it was an ex gratia cash settlement. But the bank said it would pay tradespeople directly on receipt of invoices. Loretta was unhappy with this arrangement. She wanted the bank to repay her the money she had already spent on repairs and allow her to spend the rest to complete the outstanding repairs.

Loretta and the bank ultimately struck a deal about how the money would be spent. The bank would pay Loretta $48,000 from the insurance funds to reimburse her for the money she has spent on repairs from her own pocket. Loretta would document the payments, and include invoices and bank statements. Loretta supplied some of the information, and the bank released $40,000 of the $48,000. It held back $8,000 because she had not provided all the information requested. It also paid several invoices directly to tradespeople.

Loretta complained that the bank had not adhered to the terms of the deal. She said the bank had to pay her $48,000 within 10 working days. She also said she did not have to provide supporting evidence. She complained that the bank had taken too long to pay the tradespeople. She made a further claim for reimbursement from the bank of $23,000, but the bank declined to pay this.

Our investigation

During our investigation, the bank agreed to pay her the outstanding $8,000. As for the new claim of $23,000, most of this related to amounts already paid out. When we looked at the costs, we could see only $5,000 of new unclaimed costs. The bank agreed to pay this from the insurance proceeds, too.

As for the bank’s decision to distribute the insurance money as it did, we found that, as the mortgagee, it was legally entitled to disburse the money in this way. It could opt to put the money towards repairs or towards repaying the mortgage. It is general practice for banks to pay tradespeople directly on receipt of invoices. Loretta was mistaken in her belief that the money was an ex gratia cash payment: nothing from her insurer said this. The agreement Loretta signed with the bank was clear that she would have to supply satisfactory supporting evidence. Loretta had not done this for about half of the costs she claimed. Despite this, the bank paid her most of her claims. Also, the agreement required the bank to do various things within ten days – but paying the $48,000 was not one of them.

We considered the bank had promptly paid the tradespeople. Only two invoices had taken a long time to be paid (55 and 73 days), and this was because the invoices were for remedying land defects – something not actually covered by the house insurance money. The bank nonetheless paid these invoices from the insurance payout.