Insurance money for covered damages from a home insurance claim is supposed to be used for repairs to your home, and that’s really what you should use it for. In the first place, that’s just practical. Who wants to live in a damaged house?

But the other issue is that your insurance company may decide not to renew your policy if it discovers you didn’t repair your home or the repairs weren’t completed. 

When do I have to use insurance money for repairs?

In truth, there’s nothing in a homeowners insurance policy that says an insured must use a claim check to repair damage or rebuild a home. But there are some situations where you may not be able to use insurance money for anything other than its intended purpose and others where it’s totally permissible.

Let’s say, for example, you own your home free and clear. When there’s no other interested party (e.g., your bank), then you’re not required to make repairs. You can do what you want with the money. 

You should note that houses in disrepair seldom meet an insurance company’s underwriting guidelines, which means good home maintenance is essential to keeping your coverage. Failing to make timely repairs could set you up to be nonrenewed, meaning you could lose your insurance.

Things may go differently if your lender is listed as a “loss payee” on your policy. In that case, your insurer may send the money to the lender instead of directly to you – meaning you won’t have access to the money. Your lender then places the funds into an escrow account and makes payments to contractors as repairs are made. 

It’s pretty unlikely for a lender to release any payments unless they know that repairs are being made. After all, they’ve got an investment in your home, as well, and want to ensure that it’s being properly cared for.

You should also note that some insurance companies invoke a provision in your policy called the option to repair provision. It allows your insurer to select and pay one of their preferred repair experts or contractors directly to complete all of your covered repairs, leaving you with little control over what happens to the funds. 

Ultimately, the terms of your loan and insurance policy often dictate how your claims payout and repairs are handled.

What about claims for personal property or additional living expenses?

Claim checks for personal property losses typically go directly to the policyholder. If you have replacement cost coverage, you may get an initial check for the item’s actual cash value and receive the remainder, known as recoverable depreciation, once you submit proof of purchase. 

Payments for a loss of use claim usually require receipts to be issued, as well as paperwork demonstrating your normal living expenses.

What if my insurance company overpays on a claim?

While rare, you may end up with leftover money after a claim payout. This can happen when rates for labor or materials change over time.

Any excess home insurance claim money is legally yours, provided that you did not commit insurance fraud to obtain the additional amount, or if your insurance company doesn’t expect the funds to be returned. Before deciding to keep any excess funds from a claim payment, check with your insurance company and your mortgage lender.

Does returning a partial payout lower my premium?

Returning a partial payout to your insurance company probably won’t have an impact on your premium. Even if you return some of the payout, the claim remains part of your claim history, which is one of the factors in determining your home insurance rates.

And remember, overpayments for insurance claims are pretty rare. If you’re counting on an overpayment for a particular claim, you’ll likely be disappointed.