Claim checks, holdbacks and when the money arrives

A home claim rarely pays in one check. The first payment is usually the estimated repair cost minus depreciation and minus your deductible; the withheld depreciation comes later, once you show the work was done; and if you have a mortgage, the check will probably name your lender too, which delays when you can spend it. Knowing which of those pieces applies to you tells you how much cash you need on hand when the contractor asks for a deposit.

This guide is about the money itself: the shape of the payments, who must endorse them and what to do while you wait. The legal deadlines that insurers face are covered in how long insurers have to pay a home claim, and this guide does not repeat the state-by-state clocks. It uses the ISO standard form HO 00 03 05 11 (the 2011 edition hosted by the Maine Bureau of Insurance) as its reference. Newer ISO editions, your insurer's own form and your state's amendatory endorsement can differ, so check your policy.

Why the payment comes in pieces

Replacement cost coverage on a house does not mean the insurer hands you the full replacement price on day one. Under the 2011 ISO form, the insurer pays no more than the actual cash value of the damage until the repair or replacement is actually complete. The exception is a small loss: when the cost is both less than 5 percent of the dwelling limit and less than $2,500, the insurer pays replacement cost directly. The form also lets you claim actual cash value first and then claim the rest later, if you notify the insurer within 180 days of the loss that you intend to repair or replace. The rule is on pages 14 and 15 of the form and is worded differently in newer editions, so confirm against your own policy.

That produces a typical sequence:

1. First payment. Replacement cost estimate, less depreciation, less your deductible. This is the actual cash value payment, and it is often described as the "ACV check."
2. Withheld depreciation (the holdback). The difference between replacement cost and actual cash value. You collect it when you document the completed work with invoices, a contractor's final bill and often photographs. See recoverable depreciation: getting the rest of your claim for the paperwork.
3. Supplements. If the contractor finds more damage than the first estimate captured, the insurer reopens the number, and another payment follows. supplemental claims and reopening a closed claim covers that.
4. Other coverages. Loss of use (additional living expense), personal property and debris removal often pay on their own track, with their own checks and their own documentation.

Some policies never pay the holdback. Roof payment schedules and actual-cash-value roof endorsements limit or reduce what the insurer pays on older roofs regardless of how the repair is done; see Roof payment schedules and ACV roof endorsements. The portion of depreciation that you never get back is non-recoverable depreciation, and it is the real cost of those endorsements.

A hypothetical example

Say your insurer's estimate to repair fire and smoke damage is $60,000 replacement cost, with $9,000 of depreciation and a $2,500 deductible. (All figures invented.) Here is how the payments could look.

You owe the contractor against $60,000 of work and have $48,500 in hand, so there is a $11,500 gap, of which $9,000 arrives later and $2,500 is your deductible. A contractor who wants half up front, plus a mortgage company that has not released the funds yet, can put you in a bind. That is why the payment schedule in the repair contract matters; see choosing a contractor after a home insurance claim.

Whose name is on the check

The check is payable to everyone with an insurable interest in the dwelling loss. Under the mortgage clause in the standard policy, the lender named on your declarations page is a loss payee for dwelling losses, and its right to be paid is protected even if you did something that would void your own coverage. In practice that means checks for building damage list you and the mortgage servicer, and sometimes the contractor if you signed a direction to pay. The mortgagee clause glossary entry explains the legal basis, and why your mortgage company is on the claim check covers the process for endorsement.

What happens next depends on the servicer, not the insurer. Servicers commonly hold the funds in a loss-draft account, then release them after one or more of these steps:

• You endorse the check and mail it with a loss-draft form and a copy of the claim paperwork.
• The servicer verifies the claim and the contractor's contract and sometimes inspects the work.
• Funds are released on a schedule, for example an initial amount and then installments as inspections confirm progress.

Servicers set their own thresholds and schedules, and they differ. Call the servicer's loss-draft department as soon as the claim is filed, not when the check arrives, and ask for the written procedure. If you have paid off the mortgage, the lender is no longer on the policy. If you still see the lender's name, ask your agent to remove it.

The following kinds of payment are generally not subject to the lender's name: contents (personal property) payments, additional living expense, and often smaller dwelling payments below an insurer's threshold. Whether the insurer includes the lender depends on the policy and on the insurer's own rules, so do not assume it either way.

What to do while you wait

• Get the payment breakdown in writing. The statement of loss should show replacement cost, each item of depreciation, the deductible and the net payment. If depreciation is not itemized, ask for it. Model #902, the NAIC's model claims regulation, lets an insured request the worksheets showing how depreciation was calculated, although adoption and wording vary by state.
• Ask which payments are undisputed. An insurer that accepts part of a claim and disputes the rest can generally pay the undisputed part without waiting for the rest. If your amount is in dispute, an advance on the undisputed amount is a reasonable request. See underpaid home insurance claim: how to push back.
• Deposit, do not cash-endorse blindly. Do not sign a check over to a contractor. Deposit funds you control, pay the contractor by schedule and keep lien waivers.
• Keep the claim notes. Record every call: date, name, what was promised. If a promised payment date passes, you will want that record.
• Watch for release language. Do not sign a "release" or "final proof" form with payment unless you intend the claim to close. Cashing a check that is marked as final payment on a form may be argued to waive further claims in some states, so read the language and ask first.

Timing: what counts as slow

The ISO form says the loss is payable 60 days after the insurer receives your proof of loss, once the amount is agreed on, a judgment is entered or an appraisal award is filed. State law then sets faster or additional clocks. As examples of how the NAIC model works, Model #902 has insurers accept or deny within 21 days of proof of loss and pay within 30 days of accepting. Florida, for policies it covers, requires payment or denial within 60 days of notice of the claim. None of those clocks apply to the time you spend collecting a contractor's invoice or waiting on your servicer's inspection. A check delayed by the lender is not a late payment by the insurer.

If the insurer's clock really has run, put the date in writing, cite the policy or the state provision you rely on, and ask for a response by a date. Escalate to the state department of insurance if you do not get one. The prompt payment law entry explains the interest and penalty provisions some states add.

Key takeaways

• Expect a staged payment: an actual cash value check now, withheld depreciation after repairs are documented, and supplements if more damage appears.
• A dwelling check often names your mortgage servicer, which may hold the funds and release them as work progresses; contact its loss-draft department early.
• Plan the contractor's payment schedule around the money you will actually have: the ACV payment, minus any lender hold, with the holdback arriving last.
• Under the 2011 ISO form, you may need to notify the insurer within 180 days that you intend to claim the replacement cost balance; check the deadline in your own policy.
• Delays caused by the lender, the contractor or paperwork are not insurer delays; keep notes so you can tell the difference.