Home Insurance Claims and How They are Paid

A client called me Monday morning after receiving the estimate to replace his roof from the March hail storm which struck north Texas. Before calling, he’d emailed me a copy of the claim estimate to help guide our conversation. He had a couple of questions about the estimate and payment structure, however, his biggest concern centered on one issue. If his home insurance policy is a replacement cost policy, why does the repair estimate refer to the depreciated value of his roof.

The home insurance policies I write are all replacement cost policies which means the policy is written based on what would it cost to replace your home if it were destroyed, such as by a tornado or fire. The other type of home policy is an actual cash value, or ACV, policy which pays on a depreciated basis. Replacement cost policies pay claims based on what it costs to replace a roof damaged by hail rather than its depreciated cost which is usually much less than the cost of a new roof.

Home insurance claim estimates outline the cost for materials and labor to replace the roof and then a depreciated value will be used based on the age of the roof. The reason the depreciated cost is displayed on a claim estimate is due to how the claim will be paid. Most home insurance companies have gone to dividing the payment into at least two payments. The first or initial payment is made on the depreciated value of the roof in this case which is usually enough money to order shingles and other materials needed to complete repairs for the claim and get the job started. The insurance company will make the second payment for the remaining balance, less the wind / hail deductible once the job is completed.

There are two reasons insurance companies give for making two payments. One is to protect the policyholder from being taken advantage of by a scammer who takes the money and runs. The other to cut down on the incidence of insurance fraud by policyholders. There have been too many instances where a roofing check was cashed and used for a shopping spree, to pay off debt, or something else as opposed to what it was intended for – to replace the homeowners roof.

Both checks will be made payable to the homeowner and their mortgage company, if they still have one. This is a bit of a pain as it may entail sending the endorsed check to a loan servicing branch outside of north Texas and waiting for it to be returned before the homeowner can pay the roofer. The reason insurance companies do this is because mortgage companies are an additional insured, which means they have a financial, thereby insurable, interest in the claim. They want to see the roof replaced just as much as the insurance company does.

Once I explained this to my client, he understood and appreciated he will get the full amount due as the project is completed. He’s not thrilled about having to get the checks endorsed by his mortgage company, but he is confirming with them who can sign and where the can be signed. Do you have a comment, question, or experience you’d like to share? Please share them with me on my Facebook, Google +, and LinkedIn pages. I’d love to hear from you!

Thanks!

Ed Wise

Wise Insurance Group

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