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Replacement cost insurance is designed to cover the costs of replacing your home and those contents covered under the policy if they are severely damaged or destroyed. But when you file a claim, you probably won’t get a check for the full replacement cost upfront.

Most insurance companies will issue an initial check for the depreciation value of everything needing repair or replacement, and won’t pay out the full replacement cost until repairs are complete. Furthermore, if you decide not to make the repairs, the insurance company may withhold some portions of the claim settlement.

Find out how replacement cost claims work and why insurance companies don’t always pay the full tab below.

Key Takeaways

  • Having replacement cost coverage doesn’t guarantee you will get the full replacement cost amount when you file a claim.
  • Insurance companies pay an initial depreciated amount and then pay the remaining balance when the work is done.
  • If you decide not to repair or rebuild, you may not get the remaining claim settlement amount.

If I have replacement cost coverage, will I always get the full amount?

Replacement cost insurance is designed to pay the amount required to repair or rebuild to pre-damage condition, using materials of like kind and quality, at today’s prices.

However, your insurance company may not pay the full replacement cost if you don’t make the repairs.

Insurers argue when a policyholder does not intend to rebuild or replace the damaged property, the insurance policy states the policyholder is entitled to the actual cash value of the damaged property. Most insurers calculate the actual cash value with this formula:

(replacement cost value)-(depreciation)=(actual cash value)

When a claim is approved, the insurance company will send an initial check for the actual cash value, or depreciated amount. That’s meant to provide funds to pay a deposit to contractors. The remaining amount is paid in a second check after the repairs are complete.

Do I have to make repairs with claim money?

While you don’t have to make the repairs with the claim money as a general rule, there are a number of barriers to this decision.

Claim checks for repairs to your home are made out to you and to the mortgage company, which is listed as a loss payee on your policy. You’ll need to send the check to the mortgage company to have it endorsed and cashed. With small claim amounts, the mortgage company will generally send that money right back to you.

With larger claim payments, the mortgage company can hold the money until it sees evidence that work is being done. Your mortgage company has a stake in the home, and it unlikely to release claims funds unless the repairs are underway.

Furthermore, some insurance policies have a Right to Repair clause, which allows the insurer to choose a contractor and have repairs done to the home if you don’t. Failure to repair the home may otherwise result in the cancellation of your policy, as insurance companies require homes to be a good state of repair.

Can the insurance company refuse to pay the full claim?

If you don’t do the work, you will have trouble submitting for the remainder of the replacement cost claim. The insurance company won’t pay that remainder until it has a final bill and knows the final cost. If you don’t do the work, you don’t get that final bill.

As a result, you won’t get a second check.

An exception to this is if your home is a total loss in a state with a valued policy law. Valued policy law states that the insurer must pay the full amount of the policy value in the event of a total loss. In this case, you’d get a check for the full policy value, regardless of whether you decide to rebuild. However, as noted above, your mortgage company has a say.

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Penny Gusner


Penny is an expert on insurance procedures, rates, policies and claims. She has extensive knowledge of all major insurance lines -- auto, homeowners, life and health insurance. She has been answering consumers’ questions as an analyst for more than 15 years and has been featured in numerous major media outlets, including the Washington Post and Kiplinger’s.