ADU burned down and was a total loss

[Denzel Faulken]

So I have a question, I have a property that has a main dwelling and that has a carriage house (ADU) in the back it was my first property ever bought I was severely underinsured on the carriage house. Last month my neighbors garage caught fire and turned the the carriage house into a total loss. Now my lender are debating if I have to rebuild the structure completely with the insurance money. I thought if something was a total loss I could do something else what the funds at this point I was going to do a garage or a garage/loft. Has anyone dealt with a total loss before and had a mortgage on the property ? And if so what was your result?