Say that you are due a settlement after filing a home insurance claim for damages or loss to your property. Who will get that money? Is it possible to have a home insurance payout instead of repair costs paid directly to the contractors? 

The short answer is “Yes.” It is possible to have a home insurance payout instead of getting your insurer to pay for repairs. However, each claim and insurer is different, and there are caveats involved. How the payout gets settled depends on several factors, including your insurer’s claim processes, your insurance policy, the damages at hand, and the homeownership status. 

Let’s dive into the details by covering the basics of home insurance claims and then going over whether a payout is possible. 

Home insurance payout basics

Many events, such as theft, vandalism, extreme weather events or fire, could result in a home insurance policyholder filing a claim. Whatever it is, the bottom line is that there is serious damage or loss as it pertains to the property. 

If the homeowner decides to file a claim, here is how the process will likely unfold. 

1. The homeowner secures the area & documents the damage/loss 

The homeowner starts by making a list of all items lost and taking photos/videos of all damaged property. At this stage, it is also important that the homeowner keeps receipts for expenses resulting from the damage, as these can be included in the upcoming claim. Some examples of such expenses are those incurred to secure the property or alternate living arrangements if the property is unsafe. 

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2. The homeowner contacts the insurer & makes a claim 

Next, the homeowner contacts the insurer and files the home insurance claim. This must be done within the period indicated on the insurance plan. Most insurers require policyholders to contact them within one year of the damage date, though some require it done within as little as three months. 

If the damage is relatively minor and does not affect the policyholder’s day-to-day, it may be tempting to put it off as long as possible. However, the policyholder should ensure to read the insurance details before it is too late. 

3. The insurer carries out a damage assessment & estimates a payout

Once a claim is made, the insurer will send a claims adjuster to have a look at the damage in person. At this stage, they will also work with a contractor to estimate the repair or replacement cost based on materials and labour needed for the job. This will be shared with the policyholder as a payout estimate. 

4. The payout is made to the appropriate person(s) 

Once a settlement is agreed upon, the payout will be made out to the appropriate recipient. This payout can be made in several installments or in one lump-sum payment.

Remember that certain instances make sense not to submit a home insurance claim, such as when the repair costs are similar to the deductible or the policyholder wants to avoid having their premium increased at renewal. The latter might be especially important if another home insurance claim was made within the last five years. 

Who gets the home insurance payout?

We figured out how a home insurance payout process works. But the question is, can you get a home insurance payout instead of a repair? Who gets the settlement? 

Who gets the home insurance settlement depends on several things, including the home ownership situation, the damages/losses at hand, the fine print of your insurance policy, and how the insurer operates.

It is possible that some insurers only pay their in-network contractors to do repairs and do not do cash settlements. However, if they make cash settlements, they may pay the mortgage lender instead or offer a relatively small amount compared to the other option. Here are all the possibilities of who can get the insurance settlement following a home insurance claim. 

1. The mortgage lender

If you have a mortgage on your home, the insurer might pay the home insurance settlement to the lender instead of directly to you. In this case, you will have to discuss the next steps with your lender regarding the use of this money and the oversight of the repairs. 

2. Contractor(s) 

The settlement may only be directly paid to a contractor who completes the repairs/replacements in your home. If multiple quotes are obtained, the lowest of them all will be chosen. In this option, work will only be completed if you have understood and green-lighted the work happening in your home. 

3. The homeowner/dweller

If you fully own your home (i.e. do not have a mortgage), the chances of you receiving the home insurance payout instead of repairs are quite high, though it is still possible to get it directly if you have a mortgage. 

If you want to act as the general contractor for the work in your home, you may also discuss this with your insurer. In this situation, the insurance company will not pay you any more than they would have another contractor. In addition, there may be different rules about claiming your labour costs and the warranty given for the work. 

Can you keep your home insurance payout instead of repairs? 

It is possible to keep your home insurance payout instead of repairs. Just make sure that you discuss this with your insurer at the time of making your claim. And don’t forget, payouts are negotiable. If the insurance company offers you something that does not seem fair, you can get advice from a third party and dispute the offer at hand. 

You are more likely to get a home insurance payout if you fully own your home or if payouts are a common practice for your insurer. Whatever your reasoning is for wanting a payout, be honest with your claim agent and fully understand the terms before accepting a home insurance payout instead of repairs. 

FAQs about getting a home insurance payout instead of repairs

How does a home insurance payout work?

Once the policyholder files a home insurance claim following damage or loss, the insurer carries out a damage assessment and estimates a payout for the cost of repairs and/or replacement. If the settlement amount is agreed upon, the payout is then made to the appropriate person.  

While it is possible to have the payout made directly to the homeowner, the insurance company can also choose to directly pay the contractor(s) carrying out the repairs or make the payout to the mortgage lender, if there is one. 

Home insurance payouts are usually made out in several installments and are negotiable before becoming final. If you are planning on negotiating your settlement, make sure you keep a record of your communications with the company and always get advice beforehand.

Are home insurance payouts taxable?

Insurance is complicated enough. Sadly, adding taxes into the mix does not make it any less complicated. 

Generally, home insurance payouts are not taxable in Canada, given that you use the funds to repair or replace the damage to your property. However, things are different if you have made a capital gain, meaning the settlement you have received is greater than what you have paid for the property in the first place. 

This may be the case if your home is insured at the cost of replacement. If your home is destroyed and the replacement cost is significantly greater than the purchase cost, you would technically be profiting off the insurance payout and have to file the difference as income. Most home insurance claims, however, are not as drastic as this and will not be taxable. 

Does my home insurance premium increase after a claim?

The chances of your insurance premium increasing after a claim are quite high, especially if you have made another claim within the last five/six years or have filed for a significant dollar amount. You may also see premium increases if you ask for more than you are entitled to, leading to partial or full rejection. If you have not filed a home insurance claim within the last five+ years, however, you should not see a premium increase. 

Do note that, much like your credit history, your insurance history follows you. So, switching insurance providers may not solve your issues regarding avoiding premium increases. 

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