Loss of use coverage is important homeowners policy protection
McCormick, Roy C
A woman was called at work and told to come home quickly. She picked up her son at school and rushed home to find that a devastating fire had reduced their house to ashes. As she stood next to a television news crew, surveying the smoldering ruins that had been her home, she began to realize the importance of property insurance.
Her insurance provider and the insurance company claims people responded promptly to her needs. Their considerate treatment helped ease the woman’s sense of helplessness. These professionals demonstrated the importance of good care at the time of loss.
The situation faced by this woman serves as a special reminder of the value of the unheralded homeowners policy coverage identified in most policies as Loss of Use, Coverage D. A review of the pertinent policy language underscores the scope of the valuable protection.
The limit of liability under Coverage D is an additional amount of insurance that is fixed at 20% of Dwelling Coverage A in broad and special forms that are in widespread use. It is generally 20% of Personal Property Coverage C under forms designed for renters, and 40% of Coverage C under forms issued to condominium unit owners. Insurers issuing a modified homeowners form (Form 8) for underwriting reasons fix the amount at 10% of the dwelling limit.
The limit of insurance for Coverage D, computed accordingly, is stated in the policy declarations. Coverage applies when loss to property covered under the policy, or loss of the building containing it causes the residence premises to be unlivable. It is important that the scope of the coverage and its significant conditions be made clear to insureds at a time of loss.
Most insureds will utilize the coverage under the part identified as “additional living expense.” This is defined as “any necessary increase in living expenses incurred by you so that your household can maintain its normal standard of living.”
A second option is available to insureds when a covered property loss occurs and a part of the residence premises rented to others or held for rental becomes unfit to live in. Claim may be made for “fair rental value,” meaning the fair rental value of “that part of the residence premises rented to others” by the insured, less expenses that cease during the period of unlivability.
Regarding “fair rental value,” coverage is available only if the described residence is the insured’s principal place of residence. Payment is made for the shortest time required to repair or replace that part of the premises rented or held for rental.
Note that Coverage D, insurance for loss of use, gives the insured a choice of payment of either additional living expense or fair rental value. Note also that if there is direct damage to neighboring premises by a peril insured against under the subject policy, the insured’s loss of use coverage applies for two weeks if civil authority prohibits use of the “residence premises” because of such damage.
Previous experience with loss of use coverage in action is helpful to agents and adjusters in determining what is covered and what is not. Here are some conclusions passed on by others who have been in the trenches:
Additional living expense is a consequential loss that includes only those increases in living expenses that are necessary to maintain the normal standard of living of the family or individual. It comes into play if a part of the insured premises is made unfit for use by an insured property loss. Common sense governs. For example, a dwelling is untenantable, regardless of other damage, if both bathrooms of a two bedroom house are destroyed by fire. It remains tenantable when only a sofa and a carpet underneath are burned as a result of careless smoking.
A major subject for coverage is temporary living accommodations while an insured residence is being repaired. Applying the “normal standard of living” formula, the owners of a Park Avenue townhouse could reasonably expect reimbursement for a brief stay at The Plaza. There would be payment to a young Greenwich Village apartment renter for a week at a Holiday Inn, but not on the French Riviera. Expenses that do not continue, such as the cost of utility services, are deducted from the ALE calculation.
Reimbursement for food expense is based on what is normal for an individual or family. If food expense for a family has been $200 per week and the temporary restaurant cost incurred is $450 per week, the $250 increase is covered as additional living expense.
An insured has the option of reimbursement for the fair rental value of the portion of the premises rented to another party, or which is held for rental. Individual circumstances determine the choice. A person out of town on an extended business project, who has sublet his or her residential apartment, would likely make claim for fair rental value if fire makes the premises uninhabitable.
Additional living expense coverage in homeowners policies is the personal insurance counterpart of extra expense coverage in commercial package policies. Homeowners policy coverage for the fair rental value of a portion of dwelling property assures income, as does rental value insurance in commercial package forms.
Making known to insureds the particulars of loss of use coverage at the time of a serious fire, windstorm or other covered loss is certainly a valuable service. It is reassuring to people who are undergoing a traumatic experience. But this important feature of homeowners insurance also should be pointed out to a new or longtime client at the time of sale or renewal. It has been proven over and over again that an informed insured remains a loyal insured.
Accuracy in explaining the provisions of coverage for loss of use is, of course, essential. Become familiar with the pertinent provisions and their location in your client’s policy form.
Roy C. McCormick is consulting editor of the Policy, Form & Manual Analysis Service (PF&M) published by Rough Notes.
Copyright Rough Notes Co., Inc. Dec 2002
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