Victoria’s Ombudsman says the state's workers' compensation system is failing and needs to be fixed.

Ombudsman Deborah Glass has issued a report saying a large proportion of WorkCover insurance cases are being mishandled, deliberately delayed, and even cancelled with no real medical reasoning.

She has also criticised WorkSafe's financial incentive system, which rewards agents for terminating compensation.

The investigation went back over about 500 complaints about WorkSafe and its agents in 2014–2015, poring over the handling of 65 complex compensation claims by WorkSafe agents like major insurers Gallagher Bassett Services, QBE and Allianz.

“We found cases in which agents were working the system to delay and deny seriously injured workers the financial compensation they were entitled,” she said.

Ms Glass found evidence of agents cherry-picking evidence to reject claims, often rejecting it based on just a single line in a medical report.

Independent medical examiners (IMEs) that support WorkSafe agents' decision-making were occasionally described by agents as “good for terminations”.

“The impact of this on vulnerable people cannot be overstated,” the Ombudsman said.

“The cessation of payments — for up to two years before a case is concluded — will inevitably lead to financial hardship.”

The report found 75 per cent of 130-week termination decisions were overturned by the courts.

Ms Glass has made 17 recommendations to end the unfair treatment, calling for a review of the dispute resolution process, and improvements in the oversight of complex cases.

Worksafe Victoria has issued a response claiming it will do “everything it could” to improve.

“WorkSafe acknowledges the report highlights a number of cases in which injured workers were not given the support and respect that all injured workers deserve,” WorkSafe chief Clare Amies.

“It also found instances of conduct which were totally unacceptable.”

The Insurance Council of Australia is reviewing the findings too.