There are two contracts here, one is your mortgage agreement and the other is your insurance policy. One or the other (or both) must have this provision in it. Ask them where. If they are doing something beyond the scope of the contracts, you can make them stop. If, however, one of the documents says that all these checks have to be approved by the mortgage holder, and it doesn't specify any exemptions such as the situation you describe, then they are only following the contract. Sad but true! I feel your pain.

Probably because of past problems with people just taking the money and not making the repairs, the mortgage companies now want to make sure their investment is properly repaired.

The mortgage company definitely has an interest in ANYTHING put into that house - even after purchase. If you were to default, they'd get the whole house, not just the house minus your improvements.

Seriously, your damages do affect the value of the current house. If you were to take the money and not repair, that overflow damage issue would affect the value of the home - if left undone.

If, however, you had a claim for a damaged deck, or pool that was not part of the original purchase, the bank would happily sign off on the check if you chose to not replace those items. (You would have to properly dispose of them and make certain the evidence of the removal looks reasonable.)

If you choose not to re-do the basement, the bank will require the toilet overflow damages to be repaired and have the basement cleaned up to the standards it was at time of purchase. My bank once had someone with the same issue -- homeowner fully finished basement after buying the house. Then the basement flooded. Homeowner did not want to do anything with the basement other than dry it out and then cash the check. He had flaking sheetrock, warped panelling, glue streaks all over the floor from the carpeting, and water stained and damaged woodwork. The residual damages would have lessend the value of the home, but if he ripped evererything back to the concrete walls and floor, no problem.

You agreed to the loss payee clause when you signed the mortgage during closing. The bank,is,the loss payee for all insurance claims. The insurance company could make the argument , but not likely, that because they didn't know about the Improvment not pay the claim. Normally an insurance company requires you notify them of an renovations or additions to a house that substantially improves the house or adds square footage. Usually you have some 30 to 90 days after the completion to notify them.