When the Insured Pockets the Money

It happens all the time. The insurance company pays on a claim. And the insured customer pockets the money instead of paying for repairs or replacement. But is it right?

Consider this incident that faced another insurance carrier:

An insured customer had water damage to floors in her house. The damage, however, did not extend throughout the house. As the original flooring was no longer being manufactured, she collected $14,000 from her insurance company to replace all her floors to ensure an exact match throughout the house. Instead of replacing the floors, however, she decided to buff the floors for $1,400. She pocketed the $12,600 difference.

Several years later, she again had water damage to her floors. Again she filed a claim.

This incident raises two questions:

• Should she have been compensated the first time for replacing all her flooring, not just damaged floors?
• Is she entitled to another payment from her insurance company for damage the second time? Or does her failure to replace the floors the first time invalidate a second claim?

Our answer:

The basic Insurance Service Organization homeowners contract, which forms the basis for all homeowner contracts, states that coverage includes payment only for direct damage, not consequential losses, such as those due to a matching problem. Therefore, payment for all her floors initially most likely was improper, unless her specific contract stated otherwise.

The basic contract also is clear that the insurance company is to pay no more than the necessary amount actually spent for repairs or replacement. The insurance carrier is not required to pay more than the actual cash value of the damaged goods until repair and replacement are complete.

The insured should take the $12,600 she pocketed from her first claim and pay for the second round of damage.

And, depending upon what the customer signed and attested to in the first incident, she could face insurance fraud charges that potentially carry significant penalties aside from civil charges. That is why many insurance companies verify that repair or replacement actually took place.

Such incidents have led auto insurance carriers increasingly to issue checks directly to the repair company, or jointly to the insured and repair shop. Perhaps such a practice should become more widespread in paying out homeowner claims.

As one philosopher said, "The right to do something doesn't mean that doing it is right."

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Hutchinson
First National Center, Suite 700
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Hutchinson, Kansas 67501
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McPherson, KS 67460
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Pittsburg, KS 66762
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Fee Insurance Group, a Hutchinson, Kansas, Trusted Choice independent insurance agency, offers auto, home, life, health, commercial, agriculture, and long-term care insurance plus employee benefits, retirement plans, annuities, workers' compensation, risk management and surety bonding.