A few months ago, I went to get my mail, just like any other day. What I found inside was surprising and confusing. I received an insurance refund check from our homeowners insurance company for the full amount of our annual premium. I’m usually excited when a check arrives in my mailbox, but this time I was concerned. Had my homeowners insurance been cancelled? Was this simply a mistake? Well…
Why Simply Cashing the Refund Check Isn’t a Great Idea
The first thing you may be wondering is why I didn’t simply cash the refund check and celebrate. After all, an extra $1,000 bucks would do wonders for most people’s budgets.
Unfortunately, cashing an unexpected refund check can cause you some major headaches.
First, it may mean the service you paid for has been cancelled. In my case, it would be awful if I ended up without homeowners insurance and my house burned down.
Another common issue is companies issuing refund checks in error. If this is the case, the company may ask for the money back. If I had already cashed and spent the money from my insurance refund and then had to repay $1,000 on short notice, I could be in a world of hurt. For people without any savings, this might mean going into debt to repay the money. So what should you do if you get an unexpected refund check?
Call the Company that Issued the Insurance Refund
The first thing you should do after receiving an unexpected refund check is to call the company that issued it. Ask why you received the check and make sure that any services you have with the company are still active.
In my case, I had to call my insurance agent rather than directly calling my homeowners insurance company. After much confusion — both for myself and for my agent — we figured out what had happened.
Somehow, someone made a mysterious second homeowners insurance payment to my account and a check was issued to refund it. The insurance company couldn’t tell me who made that second payment. The odd thing is that neither my mortgage company nor I claim responsibility.
In this particular case, it's important to realize that a mortgage company making a second insurance payment could hurt me within the next year. If my mortgage company had mistakenly made a second payment, my escrow account would no longer have the money necessary to make my insurance payment the following year.
Then my mortgage company would either increase my monthly payment to cover the shortage in my escrow account or require that I immediately send in a check to make up the shortage if I wanted my mortgage payment to stay the same. Neither of these options sounds fun to me, so here’s what I did with the refund check:
Cash the Refund Check, But Set the Money Aside
If something like this happens to you, I suggest you do what I did. I cashed the insurance refund check, but I set it aside in a special account where I know I won’t spend the money. If I didn’t cash the check, it would eventually become invalid. And if the insurance company or my mortgage company finally caught the error after the check became invalid, I would have to deal with some major headaches to get things fixed. Instead, I’ll have the money to send to whoever made the mistake because I simply set it aside.
While I imagine companies may still come after me for the money for quite a while, I figure that if they’re going to catch the error, it will be sometime within a year of the incident. After I finish my yearly insurance payment and escrow analysis next year, I plan to incorporate the money into my typical savings, investing, and spending plans based on my family's needs at the time. Until then, the money sits in a savings account waiting to figure out what really should have happened.