If you own a home, you’ve probably heard this urban myth of property damage overpayment: A house sustained flood damage and its owners received an insurance payout that left them with enough to go on a world cruise. While there’s at least a kernel of truth to the story, you should read your policy carefully to ensure you’re not in breach of contract.
Why Would There Be Excess Funds in a Homeowner's Insurance Claim?
Insurance companies will do everything they can to reduce the amount paid, so it’s rare to receive a significant overpayment. A claims adjuster will determine the extent of the damage and the cost of repairs. You need to know precisely what your home insurance policy provides in case of a loss. That said, homeowners who receive direct payments may have money left over by saving on the following.
- Contractors. Homeowners sometimes have control over which contractors perform the repairs, which allows them to hire contractors with a lower bid. However, if the insurer has its own network of builders and home repair professionals, it may pay the contractors’ bills directly, making excess payment unlikely.
- Materials. If you have a replacement cost value policy, your insurer must provide a payment that allows you to replace covered items with those of similar quality. You may be able to use similar but less costly materials or even install upgrades that are cheaper than the original work, such as using high-grade rubber piping instead of lead or copper.
- Lost furnishings. If you need to replace personal property, you may be able to choose new items up to your policy limit. Saving can be as simple as replacing a leather living room set with fabric couches or opting for laminate instead of ceramic tile. Your insurer may require you to show the receipts for lost items as proof of purchase before issuing a check.
- Repairs. You may forgo some repairs (as long as they don’t affect the home's safety) and put the payment from your insurance into another expense entirely. The compensation you could get varies from policy to policy, but ultimately you are owed coverage if you claim a covered event.
A Few Caveats About Overpaid Insurance Claims
In general, homeowners can keep leftover money from an insurance claim if there is nothing in their policy saying that unused claim funds must be returned. If you are legally allowed to keep the money, you are free to purchase whatever you like with it. Some savvy homeowners use the funds for home improvements, such as installing a pool, buying new appliances, or remodeling a room. Keep in mind that:
- You may not receive the funds directly. If you own the home outright, you will most likely get a check mailed to you or directly deposited into your bank account. However, the money could be sent to your lender or property management company if you have an existing mortgage or live in a condominium. It’s unlikely, but not impossible, that either company will send any leftover funds to you.
- You cannot get an extra payout by lying. You can keep an overpayment if you make a good-faith effort to estimate your losses. Deliberately misrepresenting the number and cost of damaged items is illegal and could get you arrested for insurance fraud.
- There may be a deadline to spend the excess. Some insurance companies limit how long you have to spend the payout. Usually, you have between five and seven years to use the overpayment – the same amount of time the insurance claim stays on your record.
Let Us Help You Get Full Payment for Damage to Your Home
You may not need to use cheaper materials to get an insurance company to cover your damages. If your insurer engages in bad faith tactics, the Voss Law Firm can help you get paid for much more than your losses. Call us at (888) 614-7730 or complete our contact form today to get answers to your questions, or start reading your copy of our free book, Tricks of the Trade: How Insurance Companies Deny, Delay, Confuse, and Refuse.