Who Gets the Insurance Claim Payout on a Mortgaged Home?

If you have a home mortgage, the payout check on a home insurance claim will be made out to you and your lender, meaning you will have to endorse it before sending it to your mortgage company for them to endorse. This helps to ensure that all the necessary repairs are done. Understanding how claim payouts are paid and how they are managed can help make the claims process smoother.

How do insurance companies pay out claims on mortgaged homes?

When you file a home insurance claim on a house you're mortgaging, your mortgage lender will have an active role in the payout distribution. Once you've filed a home insurance claim and it's approved, your insurer will issue a check made out to both you and your loan company.

Mortgage companies usually want to maintain some control of home insurance payouts after a claim due to their financial interest in the state of your house. Many mortgage lending agreements include a clause that gives the lender control over funds for a home insurance claim payout.

When you sign your mortgage agreement, your lender will usually require you to list them as a "loss payee" on your home insurance policy. Loss payee status allows them to receive home insurance claim payouts in order to secure their financial interests and ensure proper repair of the house.

How do I get the claim money?

After you file a claim, an adjuster will inspect the damage in your home. The adjuster may take pictures of the damage but we recommend documenting the damage yourself by taking clear photos from many angles and taking videos, too.

Depending on the amount of the claim, your mortgage company will either disburse the full amount needed for repairs or break it up into segments. If a mortgage company decides to break it up into segments, it may then put the funds into an escrow account to disburse for needed repairs.

Only the money for structural damage claims should go through your lender. Claims for personal belongings or additional living expenses are paid out directly to you. With additional living expenses (ALE) coverage, your home insurance company will send a check directly to you to cover your lodging, food and other needs while your house is being repaired.

Recoverable depreciation

Another factor that can affect how you're paid out for a claim is not in the hands of your mortgage provider, but your home insurer. Your home insurance policy should have one of two clauses: recoverable depreciation or non-recoverable depreciation.

If your home insurance policy has a recoverable depreciation clause, your initial payment will be based on the actual cash value (ACV) of the home. Here's how it differs from replacement cost:

• ACV: This payout is based on the dollar value of the parts of the home that need repair or replacement, minus depreciation due to age.
• Replacement cost: the total cost needed to restore the parts of the home to their pre-damaged state, without depreciation.

With recoverable depreciation, the first part of your claim payout will be at ACV, with the replacement cost difference paid out once the repairs are completed. If your home insurance policy has a non-recoverable clause, you will only receive a payout at ACV. There will be no more payouts on that portion of the claim afterward.

How does a payout happen if the house is a total loss?

If your house is totally destroyed, your home insurance should cover the loss up to your policy's limits. If you choose to rebuild after a total loss, the claim money usually will be held in escrow by your mortgage company and disbursed to you as the construction schedule is completed.

It's important to know that you are still obligated to pay your mortgage during the repair or rebuild process, unless the insurance claim payout completely covers the loan balance.

Alternatively, if you want to just fulfill the mortgage obligation, then you pay your lender the remainder of what you owe on the mortgage balance and your insurer will release the claim funds to you.

Can you keep leftover insurance claim money?

Depending on your state's laws, your home insurance policy and your mortgage company, you may be able to keep any remaining money from your claim payout after repairs have been completed. If you are able to find a cheap contractor who can do a satisfactory job with good materials, both your insurer and lender will likely focus primarily on the end result. If this is achieved, the remainder of the payout will probably be yours.

There is a chance, however, that your mortgage lender may have different ideas about what is done with any leftover claim funds. They may put the excess payout towards your home loan balance. The best thing to do is to ask your mortgage company what their standard practice is for surplus claim funds after the repair is completed.

If you are able to keep the remaining claim money, it's important to stay honest with both your home insurer and your mortgage lender during the repair process. Do not try to cut corners on the quality of repair work needed or falsify receipts. Either may be considered felony insurance fraud.

What if the claim amount isn't enough?

You can contact your insurer and ask them if they can review your claim again if you're not satisfied with the settlement amount. You can send new documents or hire a public adjuster, which is a third party who can help you dispute a claim. A public adjuster can cost a few hundred dollars. If the new estimate that the public adjuster provided is higher than what the insurance company offered, you can contact your insurer and provide them with the public adjuster's estimate.

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