The initial payment isn’t final

In most instances, an adjuster will inspect the damage to your home and offer you a certain sum of money for repairs, based on the terms and limits of your homeowners policy. The first check you get from your insurance company is often an advance against the total settlement amount, not the final payment.

If you’re offered an on-the-spot settlement, you can accept the check right away. Later, if you find other damage, you can reopen the claim and file for an additional amount. Most policies require claims to be filed within one year from the date of disaster; check with your state insurance department for the laws that apply to your area.

You may receive multiple checks

When both the structure of your home and your personal belongings are damaged, you generally receive two separate checks from your insurance company, one for each category of damage. If your home is uninhabitable, you’ll also receive a check for the additional living expenses (ALE) you incur if you can’t live in your home while it is being repaired. If you have flood insurance and experienced flood damage, that means a separate check as well.

Your lender or management company might have control over your payment

If you have a mortgage on your house, the check for repairs will generally be made out to both you and the mortgage lender. As a condition of granting a mortgage, lenders usually require that they are named in the homeowners policy and that they are a party to any insurance payments related to the structure. Similarly, if you live in a coop or condominium, your management company may have required that the building’s financial entity be named as a co-insured.

This is so the lender (and/or, in the case of a coop or condo, the overall building), who has a financial interest in your property, can ensure that the necessary repairs are made.

When a financial backer is a co-insured, they will have to endorse the claims payment check before you can cash it.

Depending on the circumstances, lenders may also put the money in an escrow account and pay for the repairs as the work is completed. Show the mortgage lender your contractor’s bid and let the lender know how much the contractor wants upfront to start the job. Your mortgage company may want to inspect the finished job before releasing the funds for payment to the contractor.

If your home has been destroyed, the amount of the settlement and who gets it is driven by your policy type, its specific limits and the terms of your mortgage. For example, part of the insurance proceeds may be used to pay off the balance due on the mortgage. And, how the remaining proceeds are spent depend on your own decisions, such as if you want to rebuild on the same lot, in a different location or not rebuild at all. These decisions are also driven by state law.

Your insurance company may pay your contractor directly

Some contractors may ask you to sign a “direction to pay” form that allows your insurance company to pay the firm directly. This form is a legal document, so you should read it carefully to be sure you are not also assigning your entire claim over to the contractor. When in doubt, call your insurance professional before you sign. Assigning your entire insurance claim to a third party takes you out of the process and gives control of your claim to the contractor.

When work is completed to restore your property, make certain the job has been completed to your satisfaction before you let your insurer make the final payment to the contractor.

Your ALE check should be made out to you

Your check for additional living expenses (ALE) has nothing to do with repairs to your home. So, ensure that this check is made out to you alone and not your lender. The ALE check covers your expenses for hotels, car rental, meals out and other expenses you may incur while your home is being fixed.

Your personal belongings will be calculated on cash value, first

You’ll have to submit a list of your damaged belongings to your insurance company (having a home inventory will make this a lot easier). Even if you have a replacement value policy, the first check you receive from your insurer will be based on the cash value of the items, which is the depreciated amount based on the age of the item. Why do insurance companies do this? It is to match the remaining claim payment to the exact replacement cost. If you decide not to replace an item, you’ll be paid the actual cash value (depreciated) amount for it.

To get replacement value for your items, you must actually replace them

To get fully reimbursed for damaged items, most insurance companies will require you to purchase replacements. Your company will ask for copies of receipts as proof of purchase, then pay the difference between the cash value you initially received and the full cost of the replacement with an item of similar size and quality. You’ll generally have several months from the date of the cash value payment to purchase replacements; consult with your agent regarding the timeframe.

In the case of a total loss, where the entire house and its contents are damaged beyond repair, insurers generally pay the policy limits, according to the laws in your state. That means you can receive a check for what the home and contents were insured for at the time of the disaster.

Understanding the insurance claims process

Insurance plays a crucial role in keeping our assets and loved ones protected. The irony here is that people often purchase this financial product with the hope of never actually using it. But accidents and disasters strike without warning – and when they do, those insured can be thankful for taking out the proper coverage.

When something bad happens, policyholders need to file an insurance claim to access their policies’ benefits. This often entails a complicated process but armed with the right knowledge, insured groups and individuals can find the path towards receiving payouts to be smooth sailing.

In this part of our client education series, Insurance Business will discuss the insurance claims process, how it works for different types of policies, and what impact it has on insurance premiums. We encourage insurance brokers and agents to share this article with their clients to help them navigate the often-complex procedures of filing a claim.

What is an insurance claim?

An insurance claim is a formal request filed by the policyholder to their insurer for compensation for covered losses or damages. These can include vehicular accidents for auto insurance, storm damage for homeowners’ policies, and emergency surgeries for health insurance plans.

Policyholders can only claim for losses or events specified in their policy documents, so it is crucial for them to carefully read through what’s written to understand what they are covered for. An experienced insurance professional can also help them sift through the jargon.

How does an insurance claim work?

The insurance claims process often begins with the filing of the claim. This also serves to notify a company that an unforeseen incident has occurred. This step involves filling up paperwork, which includes evidence of the covered loss, and submitting it to the insurance company.

The insurer will then investigate the validity of the claim. If the claim is found to be legitimate, the insurance carrier will issue the payment to the policyholder or an authorized party. Depending on the type of policy, the insured may be required to pay the corresponding deductible before coverage kicks in.

Six Steps in Making an Insurance Claim

Step One: Contact Your Agent Immediately

• Give your name, address, policy number, and the date and time of your loss.
• Make sure to tell your insurance agent where you can be reached, especially if you are unable to stay in your home.
• Follow up the call with a letter detailing the problem. Keep a copy of the letter.
• Your insurance agent will arrange for an adjustor to visit your property and assess the damage. Be sure the adjustor is properly licensed. In Florida, call the Department of Financial Services Consumer Help Line, toll-free, at 1-877-693-5236. If you are not in Florida, check online or in a phone book for your state’s insurance consumer help line.

Step Two: Carefully Document Your Losses

Safety first! Before entering a building, always check for structural damage. Do not go inside the building if there is any chance of the building collapsing. Be careful walking around inside and outside the building. Upon entering the building, do not use open flames since gas may be trapped inside the building. Instead, use your flashlight to light your way. Keep power off until an electrician has inspected your system for safety.

• Make a detailed list of lost or damaged property.
• Videotape and/or photograph damaged property before beginning any repairs.
• Do not throw away damaged property without your adjustor’s approval.
• Try to document the value of each object lost. To help valuate lost objects use bills of sale, canceled checks, charge account records, and insurance evaluations. If you have no such records, estimate the value, and give purchase place and date of purchase. Include this information with your list.
• List cleaning and repair bills, including materials, cost of rental equipment, and depreciation of purchased equipment.
• List any additional living expenses you incur if your home is so severely damaged that you have to find other accommodations while repairs are being made (this includes motel bills, restaurant bills, home rental, and/or car rental).

Step Three: Protect Your Property from Further Damage or Theft

• If there is roof damage or broken windows make sure to make temporary repairs. Cover damaged roof areas with tarps and cover broken windows with boards or plastic.
• If household furnishings are exposed to weather, move them to a safe location for storage.
• Remember the documentation from Step Two! Save receipts for what you spend and submit them to your insurance company for reimbursement.
• If your home has been flooded, protect your family’s health by cleaning your home right away. Floodwaters pick up sewage and chemicals from roads, farms, and factories. Throw out food and medicine that may have come into contact with floodwater. Dry out water-damaged furnishings and clothing as soon as possible to prevent fading and deterioration.

Step Four: Working with Adjustor

• Your insurance agent will arrange for an adjustor to visit your property and assess the damage. Be sure the adjustor is properly licensed. In Florida, call the Department of Financial Services Consumer Help Line, toll-free, at 1-877-693-5236. Check online or in a phone book for your state’s insurance consumer help line.
• Be sure that you or a trusted advisor is present when the adjustor visits the site.
• Work with the adjustor. It is the adjustor’s job to assist you and review your claim. The adjustor will inspect your list of lost or damaged property. The adjustor will work with you to calculate the value of the items on the list and prepare a repair estimate of damage to the property.
• You and your adjustor need to come to an agreement as to the scope of damage, which is an agreement as to what needs to be repaired or replaced without a dollar amount.
• Make sure you know what needs to be done to follow up on this agreement and why. If you do not understand what needs to be done, ask the adjustor for instructions in writing.

Step Five: Settling Your Claim

• You may settle personal property and structural claims at separate times, although your adjustor may suggest that you file the claims together. Filing the two types of claims separately allows you to take the time needed to determine the full extent of your losses.
• Do not be in a hurry to settle your claim. Wait until you have discovered all the damage before filing a claim.
• If you are dissatisfied with the settlement offer, talk things over with your agent and adjustor.
• If you and your adjustor cannot reach a settlement, you may obtain mediation through your state’s department of insurance. Mediation is an informal process where a neutral third party helps the parties resolve the dispute. If you are in Florida, call the Department of Financial Services Consumer Help Line, toll-free, at 1-877-693-5236 for information on mediation or other methods of dispute resolution. Check online or in a phone book for your state’s insurance consumer help line.

Step Six: Repairing Your Home

• You or your insurance company may contract for the repair of your home. Make sure the contractor is a reputable firm that is both licensed and insured. You can find out whether the contractor holds a proper license by contacting your state’s department of business regulations. In Florida, contact the Department of Business and Professional Regulation online, or call 1-850-487-1395 (this is not a toll-free number).
• Beware of door-to-door sellers when choosing a contractor to make repairs. Sometimes undependable workers enter a damaged area, make cheap repairs, and leave before the residents discover that the repairs are inadequate. If your local contractor cannot do the work, ask the contractor to recommend someone.
• Get a written estimate that includes any oral promises the contractor made. Always ask if there is a charge for an estimate before allowing anyone into your home.
• Your insurance company may initially pay you a sum equal to the actual cash value, unless you request minimal repairs. The company will withhold the balance of the full replacement cost until after you complete the repairs.