Should you return a partial payout from a home insurance claim?

After getting approval on a home insurance claim, the insurer may choose to pay the contractor directly or pay you, the policyholder. Sometimes, you’ll receive a partial payout and have to submit more documentation to receive the rest. Other times, you could receive more than what the repair costs are. Knowing how a home insurance payout can affect premiums and what happens if you don’t use the full payment can help you decide what to do if you are ever in this situation.

Why returning a payout does not decrease home insurance premiums

Filing a property insurance claim can increase your annual premium once it’s time to renew your policy. However, returning a claims payout or a partial payout won’t help return your homeowners insurance premium to its original rate. Your premium is based on both the frequency of claims and the amount to which they are paid. Even if you return some of the money, the claim is still part of your insurance history. Claims that result in larger payouts may cause your home insurance premium to increase more than a smaller claim, but even if you return some money to lower your claim payout, it’s not likely that you’ll return enough to offset a premium increase.

Additionally, receiving overpayment for a claim is rare. You generally receive payment in stages, with the final check issued after the insurance company receives a certificate of completion to confirm both the final cost and the actual repairs. You may need to provide invoices and photographs to show that the work is completed. In some cases, your contractor may request a “direction to pay,” which asks that they be paid by the insurance company rather than the homeowner. In this situation, you may need to confirm the work was done properly before your home insurance company pays the contractor the final installment.

How does a home insurance payout work?

There are several steps that take place during the home insurance claim payout and repair process.

1. First, a field adjuster will come to your home, take photos of the damage and provide a comprehensive report to your insurer.
2. Then, your insurance company will determine whether the loss is covered, and if it is, provide an estimate of the repair costs needed based on your policy’s coverage limits. At that point, you might receive an initial payment from the insurance company to start repair work on your home.
3. Once the work is completed, you’ll submit the Certificate of Completion (COC), which verifies the funds were used to complete the required repairs. Once the repairs are completed, your insurer will initiate the release of the remaining balance.
4. If you submit a claim for personal property, you’ll have to account for whether you have an actual cash value (ACV) policy or replacement cost coverage. Your initial claim check for personal property damage will be for ACV. For replacement cost coverage, once you’ve purchased new items to replace the damaged or destroyed items damaged in a covered peril, you can submit proof of purchase and receive a second payment for the remaining amount, covering your items at replacement cost value.

Also, remember that your deductible is subtracted from the claim amount you receive from your insurance company. Typically, you pay the deductible to the contractor completing the work, while the insurance company pays the rest. While a higher deductible typically saves you money on your annual premium, it does mean you’ll pay more out of pocket following a claim.

If you fail to complete the repairs outlined by your insurance company, you may be denied future claims or your coverage may be canceled. That’s because insurance companies have a legal obligation to provide compensation to restore the building to its condition before the loss and unrepaired damage increases risk of further expense and potentially liability concerns.

What happens if a home insurance claim payout exceeds repair costs?

There may be some circumstances in which you have leftover money in a claim payout, although this is rare. The adjuster’s estimate takes into account current market rates for labor and materials. But those actual numbers can change, and you may experience marginal savings in the repair process. For instance, your contractor may secure wholesale prices, which can lower overall repair costs compared to the initial estimate.

In this situation, you should check with your insurance carrier about what to do. You may be asked to return the overpayment, or you could be allowed to keep it. Just remember that keeping the overpayment means that your overall claim payout will be higher, which could result in a steeper premium increase.

Are there deadlines to use your payout?

Insurance payout deadlines depend on your home insurance policy. This is most relevant for policies that include replacement costs. You’ll initially be paid out based on the actual cash value. You won’t receive the final payment encompassing full replacement cost until you submit your Certificate of Completion, showing that you updated those items accordingly. You may have several months to do this, but you’ll need to check with your insurer to ensure you follow their requirements.

What happens if you don’t use the full amount in the payout

If you are faced with an excess insurance payment, contact your insurance carrier to discuss next steps.

Being open and honest about repair costs is the best course of action. Otherwise, you could (either knowingly or unknowingly) commit fraud. You must keep your home up to your home insurance company’s standards. If you don’t make required repairs, you could have future claims denied and even lose your policy altogether.

If you have a mortgage on your home, your claims checks may be payable to both you and your mortgage lender. This can make excess funds a little trickier to handle, as you’ll need your mortgage lender’s permission to cash the check and send back any overage. If your claim payouts are paid by direct deposits, you may be able to write a check to your insurance company or wire excess payments back directly. Still, you should talk to your insurance company about excess funds to understand the correct course of action.

Handling an excessive home insurance payout is a rare situation. But it’s helpful to understand how the claims process works in case you find yourself in this situation.

Frequently asked questions

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    Can I use insurance money for other things?

    If you use insurance money for other things than paying for repairs caused by a covered claim, it could be considered insurance fraud. If you have excess funds after claim repairs have been completed or received an overpayment from your insurance company, it’s best to contact them to determine the best course of action. Failing to act and using the insurance money for other things could cause your policy to be canceled and the insurer could report the incident.
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    How do I get the most out of my homeowners insurance claim?

    To get the most out of your homeowners insurance claim, you should read your policy and make sure you understand your coverage, policy limits, endorsements and exclusions. Document everything related to the claim, which you can use to dispute a claim or settlement, if needed. Having a detailed home inventory can also help ensure you get what you deserve out of your home insurance claim.
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    Can I deposit a check made out to me and my mortgage company?

    You can deposit a check made out to you and your mortgage company, but the lender will have to endorse it first. If you get a check with both yours and the lender’s name, you should contact your mortgage company’s loss department. They will provide instructions on how to get the check endorsed, which could include requiring a copy of the filed claim, estimate and invoice from the contractor. The lender may keep the funds in escrow rather than allowing you to deposit the check into your own account. The process can vary, so the first step should be contacting the lender to learn more.