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You can sue him for specific performance...meaning that they replace and correct at their expense, or you can have their insurance company cut you a check and you can elect to hire someone else. You are correct that those are the two available legal avenues.
Based on my years of experience in dealing with issues like this one, I have found that it is better for all parties involved to get the insurance check and hire someone else. When you are depending on a disgruntled contractor to fix his own mistake, it often times turns into more problems.
So, you need to send the contractor a certified letter with a return receipt (for legal notice) that you need him to either front you the replacement cost or file a claim on his insurance for the replacement costs. Tell him you need his decision within 5 business days of the post mark on the letter. If he elects to do neither, you will be forced to sue - that needs to be in the letter too.
If he will not do as you have requested, then you are going to have to follow through with the suit. That said, the legal notice referenced above will serve you well in the suit in that it illustrates you to be the reasonable person that tried to solve this without court intervention.
Please rate my answer positively and let me know if you have any additional questions.
Just checking to see if you had any additional questions. I want you to be as comfortable as possible going forward.