How do insurance companies pay out claims?
Every insurance company is different, and every state has different requirements on claims payout periods. That said, the claims settlement process in general tends to follow these basic steps:
- You file a claim.
- An adjuster is assigned to your case.
- The adjuster assesses the damage.
- The adjuster determines coverage.
- The claim is paid and you make repairs.
But how is the claim paid for, exactly? And what determines how much you’ll get? This overview will help you answer those questions so you know what to expect when you file a claim on your homeowners insurance policy.
How damage is assessed during a claim
After you file a property damage claim, an insurance adjuster will visit your home to inspect what happened and evaluate the loss. They will consider factors like:
- The square footage that’s damaged.
- The items that are damaged.
- Whether the damage can be repaired or must be rebuilt or replaced.
If you have a home inventory, be sure to hand a copy over to your adjuster – it helps expedite the process.
Once the adjuster documents all the damage, they use software to determine the value of the damage based on your home’s square footage and construction materials. They also crunch the estimates and receipts you provide to repair or replace damaged items. Then they take a look at what coverage your policy provides.
Your representative will review your policy with you, from your dwelling coverage to personal belongings and loss of use, and explain what is and isn’t covered and to what extent. The type of coverage you have impacts your claims payout, too.
How actual cash value vs. replacement cost claims are paid
When you buy your policy, you may get the option to insure your home and belongings based on their actual cash value or replacement cost. This can make a big difference in your claim payout.
If your property is insured for its actual cash value, the claim is paid out based on the property’s depreciated value. So say you bought a fridge for $800 10 years ago. Depreciation is usually calculated using a formula like this:
R × (E - C) / E = ACV.
In the equation:
- R = replacement cost of the item
- E = expected life (lifespan) of the item
- C = current life of the item
- ACV = actual cash value
So if your fridge has an expected life of 15 years, your payout comes to $266:
$800 × (15 - 10) / 15 = $266
On the other hand, replacement cost coverage offers the amount it takes to replace the item with a new, similar item at today’s market rate. So that $800 refrigerator might cost $1,000 today, and that would be what the insurance company allows to replace it.
However, don’t expect that replacement cost payout in one lump sum. Most insurers will pay out the actual cash value of the item, and then a second payment when you show the receipt that proves you’d replaced the item. Then you’ll get the final payment.
You can often submit your expenses along the way if you replace items over time.
How deductibles work in a claims settlement
Your deductible is the amount you cover when you file a claim. If your loss is less than the deductible, you won’t receive any payment from your insurer.
When your loss is more than your deductible, you’ll receive the agreed upon payment minus your deductible. So say your roof was damaged in a hurricane, and it will cost $15,000 to replace. If you have a $2,000 deductible, your payout would be $13,000. That means you will have to come up with the $2,000 to pay the contractor to complete the work.
How claim settlements work if you have a mortgage
Claims may be paid differently if you have a mortgage because your lender has a vested interest in your home getting repaired. Lenders are named as additional insureds on a policy, and that usually means the check will be issued to you and the mortgage company for the actual structure of the house. Personal property checks are payable only to you.
A check made payable to both of you can be hard to navigate, and that’s the point. The lender wants to make sure that the repairs are done instead of letting a homeowner walk away from a total loss with the payout in hand.
Sometimes, an insurance company will release payments at project milestones. When the work is completed and passes inspection, the lender will sign off on the final check. Chances are the bank will require the check to be signed over to any contractor that is performing the work if the insurance company isn’t working directly with the contractor.
How long it takes to get a claim settlement
Your state’s insurance commissioner usually outlines how long an insurance company has to pay your claim.
For example, Florida has a homeowners' bill of rights that says insurance companies have 90 days from the start of a claim to send a full payment based on the claim’s approval.
Typically, you can choose to receive your funds by:
- Direct deposit.
- A printable electronic check.
- A mailed check.
If you have a question about our claims process, feel free to call us at 866-204-2219 or submit your inquiry using our form.
