Many homeowners are unfamiliar with the home insurance claim process – and that’s okay. Some homeowners never file a claim.
Insurance companies pay claims in different ways. Depending on the type of claim, the amount owed, the work required, and other factors, insurance companies pay claims differently.
Some insurers directly pay a contractor, for example, and that contractor performs the required work on your home. Other insurers send you a check for the owed amount, and you can spend that check however you like.
Today, we’re explaining how insurance companies pay out claims, including how homeowners insurance claims are paid.
How a Homeowners Insurance Claim Works
No two homeowners insurance claims are alike. However, most homeowners insurance claims follow a similar claim process:
- You File the Claim: You contact your insurance company to notify them of the loss. The insurance company starts your claim and gives you a claim number.
- Your Insurer Evaluates the Claim: The insurer evaluates your claim. The insurer will verify any documentation you provided. The insurer dispatches an adjuster to evaluate the damage. If you have a complex claim, then it could take weeks to evaluate damages. For simpler claims, the insurer could check your paperwork and pay the claim immediately.
- Your Insurer Approves or Denies the Claim: Based on their evaluation, the insurer will either approve or deny your claim. If the insurer approves your claim, you will receive payout (or move forward with repairs). If the insurer denies your claim, then you might need to send additional evidence, hire a public adjuster, or hire an insurance attorney. If your claim is denied, see Reason Insurance Claims Are Denied and How To Dispute Claim Denials.
- You Receive your Payment: Finally, if the insurer approves your claim and there are no other issues, then you will receive your payment.
How An Insurance Company Pays You
If your homeowners insurance claim is approved, then the insurance company will pay your claim. The insurance company agrees to cover your damages, and you will receive compensation for those damages.
Depending on the type of claim and the extent of damages, an insurance company could pay you in different ways.
The two most common ways to receive payment for a homeowners include claim include:
- By check
- By paying vendors or contractors on your behalf
How Much Money Will You Receive For Your Claim?
The amount of money you receive for your insurance claim is based on two factors:
- The amount of coverage you have
- The value of the covered damage
If your home suffered $150,000 of damage during a hurricane, for example, but you only have $100,000 of homeowners insurance coverage, then your insurance will pay you up to the limits of your policy, then you cover the remaining amount out of pocket. In this case, you receive a payment from your insurance company for $100,000, and then you cover the remaining $50,000 out of pocket.
You Could Receive Multiple Payments
For larger insurance claims, you could receive multiple payments. Instead of receiving a single check for $100,000, for example, you might receive an initial check for $20,000 and then a final check for $80,000.
Insurers could send an initial check to cover emergency expenses. If your house burns down, for example, then you might be forced to live in a hotel for the near future. You might need to pay emergency contractors to repair the damage and secure the scene. Your insurer sends you an initial payment to cover these expenses.
Then, once the insurance claim is complete, the insurer sends a second or third check to cover any remaining costs. If the insurer assesses the total damage to be worth $100,000, for example, then you receive a final check for $80,000 (in addition to the initial check of $20,000).
You Might Not Have Full Control Over Payment
Many homeowners are surprised to discover they don’t have full control over payment. A lender or management company might control your payment.
If you have a mortgage on your home, for example, then the check for home repairs will be made out to you and the mortgage lender (like your bank). Most lenders require this on your homeowners insurance policy. As part of your lending agreement, you are required to name your insurer on any homeowners insurance policy, which means they are a party to any insurance payments made under that policy.
Or, if you live in a condo or apartment complex, your management company might need to be named on the policy. Your building’s management company (or the building’s owner) must be named as a co-insured.
Why does the lender or owner need to be named on the policy? The lender needs to ensure the necessary repairs are made. You do not completely own your home: your lender partly owns your home, and your home is the collateral that secures the loan.
In these cases, you cannot make a $100,000 insurance claim, then simply pocket the money and avoid repairing the property. You must use the insurance money to repair the property.
If an owner or financial company is named as a co-insured, then that entity needs to endorse the claims payment check before you cash or deposit it.
Depending on the situation, lenders could also put the insurance money into an escrow account. This escrow account pays for repairs as the work is completed.
In co-insured situations, the mortgage lender may need to know about certain repairs. Your mortgage lender may need to see the contractor’s bid, for example, and determine how much the contractor wants upfront to start the job. Then, the lender may want to inspect the finished job after the work is complete. If the work is satisfactory, the lender releases the funds to the contractor.
Total Loss Insurance Claim Payouts
After a serious incident, your home might be a total loss. The covered event may have caused more damage to your home than your home is worth. In this case, your home is declared a total loss. You can read tips about dealing with total loss insurance claims in this article.
If your home has extensive fire or water damage, for example, then it could be a total loss. Your home may need to be demolished.
In this situation, your insurer works through the same step-by-step payment process mentioned above. However, there are slight differences with a total loss claim.
With a total loss claim, you can decide how to spend your insurance payout. You might use a portion of the payout to pay the balance of your mortgage, for example. You could use remaining funds to rebuild your home, buy a different lot, or move to a different neighborhood entirely.
In some cases, state law dictates how a total loss insurance claim works. State law may stipulate who gets paid and how you spend your total loss insurance payout.
With most total loss insurance claims, the entire house and its contents are damaged beyond repair. In this situation, your insurer might pay to the limits of your policy, giving you a check for the full value of your policy.
When Insurance Pays a Contractor Directly
In some cases, insurers send you a check for the covered amount. In other cases, insurers work directly with a contractor. The insurance company sends money to the contractor, the contractor completes repairs on your home, and your insurance claim is closed.
Some contractors may ask you to sign a ‘direction to pay’ form. This form allows the insurance company to pay the contractor directly.
With a direction to pay form, you authorize the contractor to manage your insurance payout. This form is a legal document. You need to read it carefully to ensure you understand everything it means.
Some shady contractors are caught with malicious direction to pay forms. These forms authorize the contractor to handle the entire claim, for example. Other contractors obtain a direction to pay form, then disappear with your insurance money without performing repairs (or after performing low-quality repairs). Find more tips on what to look out for with insurance claim contractor scams.
All ALE Checks Are Sent Directly to You
Your homeowners insurance should cover additional living expenses (ALE). If you are forced out of your home due to a covered incident, then you might have additional living expenses – like hotels, meals, and rental cars.
Your insurance company sends ALE checks directly to you. These payments have nothing to do with home repairs, and they will not be sent to your contractor or a lender.
You Receive Payment for Possessions Based on Cash Value
Your home is filled with your possessions. Your homeowners insurance covers most of these possessions.
If your TV is worth $2,000, for example, and your laptop is worth $1,500, then your homeowners insurance will pay you $3,500 to compensate for the loss of these items.
Your insurance covers items based on their cash value. You might have paid $1,500 for your laptop two years ago, although that laptop is only worth $800 today. This is the cash value of your laptop: it’s the cost of the item minus depreciation.
To claim your damaged belongings, you need to submit a list of items to your insurance company. Some experts recommend keeping a home inventory to make this process easier.
Even if you have a replacement cost policy (which is more expensive), your insurer covers the cash value of items first. Your insurer verifies the value of each item, then subtracts depreciation.
If You Want Replacement Value for Possessions, You Must Replace Them
Your insurance company could fully reimburse you for damaged items. However, to receive the full replacement value for your items, you need to actually replace those items.
If you lost your $1,500 laptop in a house fire, for example, then you might replace that item with a $1,500 laptop purchased brand new. Your insurer requires proof that you replaced the item (like a receipt). Then, the insurer pays the difference between the cash value you initially received for the lost item and the full cost of the replacement item.
You receive payment based on the value of the replaced item – not the value of buying a newer item. Your laptop cost $1,500 two years ago, but it does not cost $1,500 today. You can buy the same laptop brand new for $1,000 today. Your insurance company compensates you for that value – not the value of buying a better item.
Most insurers give you several months to purchase replacement items. Ask your insurance agent about any timeframe requirements.
Claim Payment Problems? What Happens Next
In a perfect world, your insurance company accepts your claim, sends payment, and closes your claim.
Unfortunately, insurance claims don’t always work that way. Insurance claims can get messy. Insurers can deny your claim or reduce your payout.
Sometimes, insurers need more evidence. You might need to submit more receipts, photographs, and other documentation.
In other cases, insurers are acting maliciously. They demand too much evidence. They deny your claim without sufficient reason. They drag their feet, take too long to contact you, and operate in bad faith.
When insurers operate in bad faith with homeowners insurance payouts, consider hiring a public adjuster or insurance attorney.
These professionals represent you against your insurance company. They tell your insurer you are taking the claim seriously. They fight to ensure you get every penny legally owed to you.
Schedule a free consultation with a public adjuster today. Discover your options for maximizing homeowners insurance payouts.