How are homeowners insurance claims paid?

You want to get back to normal as soon as possible after a calamity, and your insurance company wants the same thing! As you make temporary repairs, permanent repairs, and replace damaged items, your insurer may send you additional payments. Here's all you need to know about insurance claim payments.

The first payment isn't the final one.

In most cases, an adjuster will examine the damage to your house and offer you a specific amount of money for repairs based on the terms and restrictions of your homeowner's policy. Your insurance company's initial check is frequently an advance against the total settlement amount, not the final payment.

You can accept the cheque straight immediately if you're offered an on-the-spot settlement. If you discover additional damage later, you can revisit the claim and file for more money. Most policies require claims to be filed within one year of the disaster; check with your state insurance department to learn more about the laws in your area.

You might get several checks.

When your home's structure and personal possessions are both destroyed, your insurance company usually sends you two separate checks, one for each type of loss. If your home is uninhabitable, you'll also get a payment for the additional living expenses (ALE) you'll have to pay if you can't live in it while it's being fixed. If you have flood insurance and have had flood damage, you will receive a second check.

Your payment may be under the supervision of your lender or management firm.

If you have a mortgage on your home, the repair check will usually be made out to both you and the lender. Lenders typically ask that they be mentioned in the homeowner's policy and that they be a party to any insurance payments linked to the structure as a condition of granting a mortgage. If you reside in a coop or condominium, your management firm may have required the financial entity of the building to be named as co-insured.

This is so that the lender (and, in the case of a coop or condo, the entire building) can ensure that the essential repairs are performed.

When a financial backer is also co-insured, the claims payment check must be endorsed before you can cash it.

Lenders may alternatively put the money in an escrow account and pay for the repairs as they are performed, depending on the conditions. Show your contractor's bid to the mortgage lender, and tell them how much the contractor wants upfront to start the job. Before transferring payments to the contractor, your mortgage company may want to check the completed job.

Your policy type, its specific restrictions, and the terms of your mortgage determine the amount of the payout and who receives it if your home is damaged. Part of the insurance proceeds, for example, could be used to pay off the mortgage balance. And how you spend the remaining funds is entirely up to you, such as whether you want to rebuild on the same lot, in a new area, or not at all. State legislation also influences these decisions.

Your insurance company may pay your contractor directly.

Some contractors may request that you sign a "direction to pay" form, which authorizes your insurance company to pay the firm directly. Please read it carefully because this is a legal document to ensure that you are not assigning your entire claim to the contractor. Before you sign, call your insurance agent if you have any doubts. Setting your whole insurance claim to a third party removes you from the process and places the contractor in charge of your claim.

Before allowing your insurance to make the final payment to the contractor, double-check that the work on your property has been done to your satisfaction.

Make your ALE check payable to you.

Your ALE (additional living expenses) check has nothing to do with home repairs. As a result, make sure the assessment is made out to you and not your lender. The ALE check will pay your hotel, car hire, restaurant meals, and other out-of-pocket expenses while your house is being repaired.

The value of your personal belongings will be determined initially on a cash basis.

You'll need to provide your insurance company with a list of your damaged possessions (having a home inventory will make this a lot easier). Even if you have replacement value insurance, the first check you'll get from your insurer will be for the cash value of the items, which is the depreciated amount depending on their age. Why do insurance firms behave in this manner? Its purpose is to match the balance of the claim payout to the exact replacement cost. You will be paid the actual monetary worth (depreciated) for an item if you choose not to replace it.

You must replace your stuff to earn replacement value.

Most insurance companies will require you to purchase replacements to be wholly reimbursed for damaged items. Your firm will request copies of receipts as proof of purchase, after which they will pay the difference between the cash value you initially got and the entire cost of replacing the item with one of similar size and quality. You'll usually have several months from the date of the cash value payout to buy replacements; check with your agent for more information.

In the event of a total loss, where the entire house and its contents are destroyed beyond repair, insurers typically pay the policy limits based on your state's rules. That means you'll get a payout for the value of your home and possessions at the time of the incident.