In most instances, an adjuster will inspect the damage to your home and offer you a certain sum of money for repairs, based on the terms and limits of your homeowners policy. The first check you get from your insurance company is often an advance against the total settlement amount, not the final payment.
If you're offered an on-the-spot settlement, you can accept the check right away. Later, if you find other damage, you can reopen the claim and file for an additional amount. Most policies require claims to be filed within one year from the date of disaster; check with your state insurance department for the laws that apply to your area.
You may receive multiple checks
When both the structure of your home and your personal belongings are damaged, you generally receive two separate checks from your insurance company, one for each category of damage. If your home is uninhabitable, you'll also receive a check for the additional living expenses (ALE) you incur if you can’t live in your home while it is being repaired. If you have flood insurance and experienced flood damage, that means a separate check as well.
Your lender or management company might have control over your payment
If you have a mortgage on your house, the check for repairs will generally be made out to both you and the mortgage lender. As a condition of granting a mortgage, lenders usually require that they are named in the homeowners policy and that they are a party to any insurance payments related to the structure. Similarly, if you live in a coop or condominium, your management company may have required that the building's financial entity be named as a co-insured.
This is so the lender (and/or, in the case of a coop or condo, the overall building), who has a financial interest in your property, can ensure that the necessary repairs are made.
When a financial backer is a co-insured, they will have to endorse the claims payment check before you can cash it.
Depending on the circumstances, lenders may also put the money in an escrow account and pay for the repairs as the work is completed. Show the mortgage lender your contractor's bid and let the lender know how much the contractor wants upfront to start the job. Your mortgage company may want to inspect the finished job before releasing the funds for payment to the contractor.
If your home has been destroyed, the amount of the settlement and who gets it is driven by your policy type, its specific limits and the terms of your mortgage. For example, part of the insurance proceeds may be used to pay off the balance due on the mortgage. And, how the remaining proceeds are spent depend on your own decisions, such as if you want to rebuild on the same lot, in a different location or not rebuild at all. These decisions are also driven by state law.
Your insurance company may pay your contractor directly
Some contractors may ask you to sign a "direction to pay" form that allows your insurance company to pay the firm directly. This form is a legal document, so you should read it carefully to be sure you are not also assigning your entire claim over to the contractor. When in doubt, call your insurance professional before you sign. Assigning your entire insurance claim to a third party takes you out of the process and gives control of your claim to the contractor.
When work is completed to restore your property, make certain the job has been completed to your satisfaction before you let your insurer make the final payment to the contractor.
Your ALE check should be made out to you
Your check for additional living expenses (ALE) has nothing to do with repairs to your home. So, ensure that this check is made out to you alone and not your lender. The ALE check covers your expenses for hotels, car rental, meals out and other expenses you may incur while your home is being fixed.
Your personal belongings will be calculated on cash value, first
You'll have to submit a list of your damaged belongings to your insurance company (having a home inventory will make this a lot easier). Even if you have a replacement value policy, the first check you receive from your insurer will be based on the cash value of the items, which is the depreciated amount based on the age of the item. Why do insurance companies do this? It is to match the remaining claim payment to the exact replacement cost. If you decide not to replace an item, you’ll be paid the actual cash value (depreciated) amount for it.
To get replacement value for your items, you must actually replace them
To get fully reimbursed for damaged items, most insurance companies will require you to purchase replacements. Your company will ask for copies of receipts as proof of purchase, then pay the difference between the cash value you initially received and the full cost of the replacement with an item of similar size and quality. You'll generally have several months from the date of the cash value payment to purchase replacements; consult with your agent regarding the timeframe.
In the case of a total loss, where the entire house and its contents are damaged beyond repair, insurers generally pay the policy limits, according to the laws in your state. That means you can receive a check for what the home and contents were insured for at the time of the disaster.
Next steps: We can't reinforce it enough - claims are easier to make when you have a home inventory ready!
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If you use consumer reports to underwrite insurance policies or screen high-risk applicants, you must comply with the Fair Credit Reporting Act (FCRA).
The FCRA is designed to protect the privacy of consumer report information — sometimes informally called “credit reports” — and to guarantee that information supplied by consumer reporting agencies (CRAs) is as accurate as possible.
Consumer reports may include information about a person’s credit history, medical conditions, driving record, criminal activity, and even their participation in dangerous sports.
Insurer Obligations
You must have a permissible purpose before obtaining a consumer report — generally, that the report will be used in connection with the underwriting of insurance involving the consumer or with the consumer’s permission (§ 604) — and must take certain steps after you take an adverse action based on information in the report.
Getting and Using Medical Information
If you need a consumer report that has medical information, you must get the applicant’s
permission before the CRA can issue the report. § 604(g)(1)(A). You may share the medical information only to carry out the transaction for which the report was obtained, or as permitted by law. § 604(g)(4).
Adverse Action Notice
When an adverse action is taken — for example, when insurance is denied, rates are increased or a policy is terminated — and the decision is based partly or completely on information in a consumer report, Section 615(a) of the FCRA requires you to provide a notice of the adverse action to the consumer. The notice must include:
- the name, address and telephone number of the CRA that supplied the consumer report, including the toll-free telephone number for the CRA if it maintains files nationwide;
- a statement that the CRA that supplied the report didn’t make the decision to take the adverse action and can’t give the specific reasons for it; and
- a notice of the individual’s right to dispute the accuracy or completeness of any information the CRA furnished, and the person’s right to a free report from the CRA, within 60 days, if the person asks for it.
Disclosure of this information is important because some consumer reports may have errors. The adverse action notice is required even if information in the consumer report wasn’t the primary reason for the denial, rate increase, or termination. Even if the information in the report played only a small part in the overall decision, the applicant must be notified.
While adverse action notices are not required to be in writing, many insurers provide them in writing and keep copies for two years to prove compliance with the FCRA.
Examples
These situations show when an adverse action notice must be given to insurance applicants.
A life insurance company orders a consumer report from the Medical Information Bureau (MIB), a CRA. Information in the MIB report leads to further investigation of the applicant. The application for insurance is rated or declined because of information learned from the investigation, whether the decision was based partly or completely on the information.
Section 604(g) of the FCRA requires an insurance company or any other user of medical information to get the consumer’s consent — orally, electronically or in writing — before getting medical information. That means the life insurance company in this situation would have to have obtained the consumer’s consent before getting the consumer report from the MIB. In addition, since the MIB report was part of the basis for the adverse decision in this case, the Section 615(a) adverse action notice described above must be sent to the consumer.
A person with an unfavorable credit history, say, due to a bankruptcy, is denied automobile insurance at standard rates. Although the credit history was considered in the decision, the applicant’s limited driving experience was a more important factor.
The applicant is entitled to the Section 615(a) adverse action notice because the credit report played a part — even a small one — in the insurer’s decision to charge a higher premium.
An insurance company orders a consumer report on an existing policyholder to make sure the policyholder continues to qualify for the coverage in the policy. The insurance company learns that the consumer’s credit history has declined since the policy was written originally, and raises the consumer’s premiums.
The applicant is entitled to a Section 615(a) adverse action notice, because “adverse action” includes an increase in the charge for existing insurance or another unfavorable change in the terms of existing insurance, such as the amount of coverage or the policy’s terms.
§ 603(k)(1)(B)(i).
Disposing of Consumer Report Information
When you finish using a consumer report, you must securely dispose of the report and any information you gathered from it. That means burning, pulverizing or shredding paper documents, and disposing of electronic information so that it can't be read or reconstructed. For more information, see Disposing of Consumer Report Information? Rule Tells How.
Other Considerations
If you report information, like a consumer’s insurance claims, to a CRA, you have legal obligations under the FCRA’s Furnisher Rule. Your responsibilities include:
- furnishing information that is accurate and complete, and
- investigating consumer disputes about the accuracy of information you provide.
For more information, see Consumer Reports: What Information Furnishers Need to Know.
Non-Compliance
If you don’t comply with the FCRA, you may be sued by the FTC, Consumer Financial Protection Bureau (CFPB), state governments, or in some cases, consumers. The FCRA provides for maximum penalties of $4,367 per violation in the case of lawsuits brought by the FTC. FCRA Sections 616, 617, 621
Your Opportunity to Comment
The National Small Business Ombudsman and 10 Regional Fairness Boards collect comments from small businesses about federal compliance and enforcement activities. Each year, the Ombudsman evaluates the conduct of these activities and rates each agency's responsiveness to small businesses. Small businesses can comment to the Ombudsman without fear of reprisal. To comment, call toll-free 1-888-REGFAIR (1-888-734-3247) or go to www.sba.gov/ombudsman.
The FTC works to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. Watch a video, How to Report Fraud at ReportFraud.ftc.gov, to learn more. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.
[Note: Edited January 2022 to reflect Inflation-Adjusted Civil Penalty Maximums.]