With over 128 million households, 283 million cars in operation, and the ever-increasing price of real estate, which soared dramatically in 2021, it’s no wonder more and more people are eager to protect their property and belongings from the unexpected.
It’s almost unimaginable to not have homeowners insurance. But here’s the thing: while most people know what type of insurance they want – about 90% of Americans choose all-encompassing peril-open HO-3 and HO-5 policies over named-peril HO-1 and HO-2 – almost half the policy owners are not fully aware of what exactly their policy covers.
Loss of Use Coverage as a Part of Homeowners Insurance
The absence of knowledge leads to confusion at best and financial losses at worst. And this is exactly why we are going to preface our ‘loss of use insurance’ piece with six coverages that a typical homeowners policy includes:
- Coverage A: damage to the house.
- Coverage B: damage to the structures or detached buildings.
- Coverage C: damage to personal property (for example, jewelry).
- Coverage D: additional living expenses aka loss of insurance coverage.
- Coverage E: personal liability.
- Coverage F: medical expenses.
Now, while all the types of coverage are important and worth elaborating on, we will only focus on Coverage D. For other parts of homeowners coverage, navigate to our ‘home insurance’ section.
Loss of Use Coverage: What Is It and Why It Might Be Helpful?
We don’t have to tell you how expensive houses are in the U.S. With hundreds of thousands of dollars spent on your stronghold – or even if you rent a house – you do want to keep it safe and reduce all associated risks.
Speaking of which, there are quite a few disasters that can render your home uninhabitable, making you search for a temporary shelter until your house is fully repaired and ready to re-accommodate you.
- If, for example, a pipeline were to break in the middle of winter, or a hurricane or house fire were to destroy your house, you would have to face exorbitant expenses. Hotel accommodation bills, food, laundry – you can only realize how comfortable and cheap your life was when this comfort ends. With the use of loss coverage, though, you would have been reimbursed the money you had to spend so that your life could become comfortable again.
However, even though the loss of use coverage is extremely helpful to mitigate the financial and moral discomfort from the unexpected, it doesn’t cover every possible case. Let’s see what you can and cannot cover with loss of use insurance.
What Is Covered by Loss of Use Coverage?
The only way to differentiate between what is covered and what is not covered by your loss of use insurance policy is to peruse it, as insurance policies vary in a pretty wide range. That said, a typical loss of use insurance policy is expected to include two main types of coverage:
- Additional living expenses (ALE).
- Fair rental value.
Additional Living Expenses (ALE) Coverage
As you might have guessed from the title, whenever the peril covered by the policy occurs – note, however, that some perils (for example, flood) may be specifically excluded from the policy) – you shouldn’t worry about the subsequent additional expenses. From motel accommodation to laundry to food to parking, the costs exceeding your normal spending will be compensated.
- For example, if during the first week after the insurance case you’ve spent $1,000 more than you usually spend in a week, then this $1,000 will be reimbursed. But then again, it doesn’t mean that the insurer will cover you forever – chances are the coverage will be provided for the shortest term, as per the terms of your policy.
Fair Rental Value Coverage
While the homeownership rate hovers around 66%, a fair share of homeowners rent out their houses, either fully or partially. Luckily, they can also be covered. Fair rental value coverage provides reimbursement for lost rental income in case the house that is rented has suffered a peril and become uninhabitable.
- For example, if your monthly rental income amounted to $1,000, and your house was rendered uninhabitable just the same period, you would be reimbursed the full rental amount, i.e. $1,000.
Last but not least, even intervention from the government can be covered under loss of use coverage. Though pretty rare, it might happen that the government temporarily prohibits living in your house due to, for example, a wildfire nearby. In this case, government intervention coverage will compensate for your losses.
What Is Not Covered by Loss of Use Coverage?
It goes without saying that you have to be very attentive when reading any insurance policy, and loss of use is no exception. Here are the cases that may catch you off guard:
- You will not be reimbursed if you are forced to leave your house due to anything not covered in your policy or explicitly excluded from it. The most widespread case is flooding. Floods are not covered by loss of use insurance.
- You will not be reimbursed if you are leaving your house due to subjective reasons, such as remodeling.
- You will only be reimbursed the amount that exceeds your normal – not luxurious – living expenses. If you normally spend $1,000 a week, then you can only get reimbursement if you’ve spent $1,001 or more during the same time. The rest – that is, everything that is under $1,000 – you will have to pay out of your pocket.
- There’s a payment limit to any loss of use coverage, which is 10% to 30% of your dwelling coverage. Everything beyond it will have to be paid out of your pocket.
Does Loss of Use Coverage Apply to Condos?
It does. Condominiums can be covered with homeowners insurance and the D part of it in particular. Note, however, that the amount of loss of use coverage you need for a condo – especially as a condo owner (HO-6 policy, a standard condo insurance policy, does include loss of use coverage) – may be different from the amount of coverage you need for a relatively small house.
Does Loss of Use Coverage Apply to Cars?
Contrary to popular opinion, it does. Just like your house, your car may need repairs, which may temporarily limit your mobility. With the loss of use auto coverage, however, you will receive fair compensation for the losses you suffer from the inability to drive (for example, you may be compensated the amount you need to rent a car of the same class). What’s more, even if your car is declared a total loss, you will be compensated for the time you had to spend waiting for the total loss compensation (which means you’ll be reimbursed twice).
How Much of Loss of Use Coverage Is Enough?
When calculating your best use of coverage limit, the only objective thing you should know is that the amount of loss of use coverage is usually from 20% to 30% of the dwelling coverage. The rest should be dictated by your personal preferences, namely how you juggle the probability of the insurance cases and the money you are ready to part with to safeguard yourself against those possible disasters.
List of References
Oleksandr is an expert in deep research. He covers insurance topics across four major insurance verticals – auto, health, life, and home insurance – while taking into account the legal landscape of the state in question. Come rain or shine, you can expect regular quality blogs and timely updates from Oleksandr.