Are car insurers underpaying claims?

You'll only know how good your insurer is when you need to claim – and our new research suggests many aren't good enough.

While soaring premiums leave many car insurance customers unconvinced they're getting value for money, others are also feeling ripped off when they claim.

We asked nearly 3,000 drivers to rate their insurer on the value of the settlements they were paid. Of 24 insurers rated, eight received a poor two stars out of five in our analysis. 

This comes as industry regulator the Financial Conduct Authority (FCA) scorns car insurers for underpaying total loss claims.

Here, we reveal how the different providers fared and help you ensure you get a fair settlement.

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Is your payout fair?

According to the most recent FCA statistics, almost all (99%) car insurance claims are accepted. While this compares favourably with other types of insurance, such as home and travel cover, it only tells part of the story.

When we surveyed 2,793 drivers who had claimed on their insurance in the past two years, they were asked to rate their provider on several elements of how their claim was handled, including the value of any settlement received. 

As the table below shows, of the 24 insurance providers receiving a star rating out of five, one in three fared poorly – with two stars each – while the remainder scored three stars.

Why the regulator is sounding the alarm

While our research reflects general levels of satisfaction around claims values, it emerges as the FCA warns that some insurers may be systemically offering less-than-fair cash settlements to customers making 'total loss' claims (those whose cars have been stolen or written off).

In a total loss claim, your insurer will either offer to replace your car with a like-for-like model or, more commonly, provide a cash settlement reflecting its value as of immediately before the accident.

This is likely to be substantially less than what you initially bought the car for – especially if it was bought new – as they notoriously lose value quickly.

Insurers instead use a variety of information sources such as trade guides to estimate the car's 'market value'. While these estimates can be challenged and revised, insurers aren't supposed to make 'opening' offers that they know to be less than the customer is entitled to.

However, in its review, the FCA commented that some of the firms it examined 'would sometimes provide initial settlement offers that are below the insured vehicle's estimated market value or at the lower end of an identified range'. 

Their expectation was that they would then increase the offer if the customer challenged the original one or complained, even if the customer provided no additional information.

The regulator reviewed data supplied by a sample of 12 insurance firms, reflective of around 70% of the market, as well as guide valuations used to estimate car prices. It found that with some firms, average settlement values were lower than available guide prices, indicating that some customers' claims may have been handled unfairly.

The report also noted that a 'small' number of firms told customers that they use the approach of the Financial Ombudsman Service (FOS) to valuing cars when explaining their offers – which risks giving the impression that there would be no point in complaining to the FOS about the size of a total loss settlement.

This isn't the first time the FCA has raised undervaluation of claims as an issue, having flagged it multiple times since December 2022 when it claimed to have seen evidence that some customers were receiving unfairly low settlements.

It has yet to name the individual insurers whose practices it criticised in its recent review.

• Find out more: the best car insurers for claims handling.

A payout offer nearly £1,000 short

Which? was contacted by a couple who had been involved in an accident in February this year after another car drove into them. Their vehicle – a second-hand Kia Sportage, which was bought for £12,395 in November last year – was written off as a result.

Their insurer, Hastings Direct, which asked them about the value of their car at the time of starting the policy, initially offered the couple a settlement of £8,400, which was £4,000 short of the price the couple paid for the car.

After the couple refused the first offer, Hastings came back with £8,610, which was also refused.

Hastings then asked their own expert to value the car and their third offer was £9,285 – still more than £3,100 short of what the couple paid and only £885 more than Hastings first offered.

Hastings Direct told Which?: 'We aim to settle claims quickly and fairly and in line with the current market value of a vehicle that is written off. In this case, we made an initial offer based on the vehicle information available. 

'However, following receipt of further information about the vehicle, including an engineer's report and photos, we offered an updated offer of £9,300 to the couple and they accepted this amount. We have apologised for the payment delay and are pleased the couple are happy with this outcome."

4 ways to get a fair settlement

Under the FCA's Consumer Duty, enacted last July, firms are required to ensure consumers are at the heart of their business, with companies obligated to act to deliver good outcomes for their customers.

We want the FCA to hold insurers to account over poor payouts. But for now, you'll need to take your own precautions:

1. Check your policy for 'new car replacement' cover

If you bought your car new and it's one to two years old (this depends on the policy), many insurance policies offer New Car Replacement cover. This is an option to have the insurer replace your car with a like-for-like model, rather than pay you its market value. 

If this is an option for you, it's likely to be preferable to the cash settlement.

2. Offer seems low? Ask the insurer to explain its workings

If an insurer makes a cash offer, it's likely to be lower than what you paid to buy the car – especially if this was some time ago. However, regard it as a first offer and check trade quotes for similar models in a similar condition to yours to see how they compare. If you can, getting an expert to value your vehicle can also add weight to your case. 

Most importantly, ask the insurer to explain how it arrived at its estimate. It may be willing to reconsider, especially if its offer is based on partial information.

3. Be ready to complain

In some cases, lodging a complaint is evidence that you're serious about getting a fair offer. 

According to FCA statistics, few (5%) car insurance claimants do this. But it shouldn't prove a huge amount of effort and there's a fair chance it will pay off as 62% of insurance complaints are upheld (in the customer's favour) by the insurer. 

4. Go to the Financial Ombudsman Service

If you've not been able to get a satisfactory result from your insurer (following a complaint), go to the FOS. The FOS is a free-to-use  service, which will impartially review your complaint and the insurer's decision. 

While there's no guarantee that it will find in your favour, the insurer has to follow its recommendations if the FOS believes the offer you received was unfair.

• Find out more: Best car insurance companies in the UK 2024.

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