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

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In rare instances, you may file a property insurance claim only to find out that the estimate’s amount exceeded the repair costs incurred. If you’re wondering how to handle the excess funds from your home insurance payout, there are several factors to take into consideration.

Much of this depends on how the payout was handled and what type of claims were made. In some instances, your insurer may pay the contractor directly, so you wouldn’t have to worry about an excess payment. However, in other cases, you may receive a separate check for each type of damage. One might cover the estimated cost to repair your home’s structure, one might go toward additional living expenses and another may be for replacing damaged personal property.

Understanding how to manage all of the claim funds that make up such a complex payout structure can help you more easily navigate the claims process.

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. If you repurchase an item that has been damaged or destroyed due to a covered peril, you’d get an initial claim check for ACV based on what contents need replacement. If you have replacement cost coverage, you’d 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. 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 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.

Written by
Lauren Ward
Insurance Contributor
Lauren Ward has nearly 10 years of experience in writing for insurance domains such as Bankrate, The Simple Dollar, and Reviews.com. She covers auto, homeowners, life insurance, and other topics in the personal finance industry.
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Insurance Editor
Reviewed by
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