LOSS OF USE COVERAGE

(July 2020)

Loss of Use is included as a coverage part in both standard homeowner and dwelling property policies and this significant coverage often goes unnoticed. It pays an insured for necessary increases in living expenses and, when applicable, for loss of rental income. The increased expenses or rental loss must result from a covered cause of loss that makes the insured premises uninhabitable.

Under ISO's Homeowners Forms HO 00 04 and HO 00 06, the coverage applies not only to loss to covered personal property, but also to the building containing the covered property.

Example: Pete A. Partment lives in an older four-unit apartment building and he insures his personal property with an ISO HO 00 04 (tenant) policy. During a severe cold spell, the building’s furnace unit catches fire. It will take a week to repair the furnace and, even though Pete’s property was undamaged, the building will have to be vacated until repairs are completed. Since a fire created the need to make a temporary move, Pete’s policy will provide coverage for the extra expenses he suffers.

Note: Loss Of Use coverage also provides protection against "additional living expense" or "fair rental value" loss if a civil authority forbids use of the residence premises as a result of direct damage (by an insured peril) to a neighboring premises. However, this coverage is limited to a period of two weeks.

AMOUNT OF INSURANCE

Loss of use coverage is an additional amount of insurance. The minimum amount required is a percentage of another coverage limit but both vary according to the Homeowners form.

HO Form	Loss Of Use Coverage Limit of Insurance
HO 00 02	30% of the Coverage A Limit of Insurance
HO 00 03	30% of the Coverage A Limit of Insurance
HO 00 05	30% of the Coverage A Limit of Insurance
HO 00 04	30% of the Coverage C Limit of Insurance
HO 00 06	50% of the Coverage C Limit of Insurance
HO 00 08	10% of the Coverage A Limit of Insurance

OCCUPIED PROPERTY

With regard to the part of the residence premises where the insured resides, the policy covers either "additional living expense" or "fair rental value" if a covered loss makes the residence uninhabitable.

ADDITIONAL LIVING EXPENSE

Additional living expense refers to reasonable, necessary additional costs that allow the insured household to preserve its regular living standard. Fair rental value refers to the amount of rental income an insured could receive for the area that either was rented or was intended for rental. However, the figure is net of any expenses that cease during the time that the insured property is unavailable. Payment terminates with repair or replacement of the damage or, if the insured permanently relocates, settlement of the household elsewhere.

LOSS OF INCOME

This section of the coverage provides "loss of income" coverage and applies when rental of the premises is a regular practice.

Example: An insured has to vacate her residence because of a covered loss. The home includes a “mother-in-law’s” suite, but that part of the home has never been rented out. Although that portion of the home, along with everything else, is inaccessible, the insured is not entitled to reimbursement for loss of rental income. Why not? Because the loss did not affect any flow of current or potential rental income.

DAMAGE TO NEIGHBORING PREMISES

Under a third provision in the Loss of Use portion of the policy, there is coverage for an "additional living expense" or "fair rental value" loss if civil authority prohibits use of the residence premises as a result of direct damage by an insured peril to a neighboring premises. This coverage is not to exceed two weeks. It is important to realize that the reason for vacating a home has to be due to “direct damage” to a neighboring location.

Example: The Panicson family’s home is insured by an ISO HO 00 02 policy. One day, their neighbor’s home is severely damaged and is in danger of collapsing. The fire marshal orders the Panicsons to leave their home for a few days until the neighbor’s home is propped up and repairs are underway.

Scenario 1:The damage is due to a fire:

The Panicsons would qualify for Loss of Use Coverage since fire is an eligible cause of loss under the

HO 00 02 policy.

Scenario 2:The damage to their neighbor’s home is due to flash flood waters severely undermining their foundation:

In this scenario, the Panicsons would not be eligible for Loss of Use coverage because the damage to their neighbor’s home is not a cause of loss that’s covered by the HO 00 02 policy.

The reason for the above requirement is that the intent of the form is to provide more coverage to an insured, but to keep the scope of coverage in line with the policy's rating and underwriting assumptions. With its current wording, the option is a reasonable extension of coverage that falls within the original intent to protect a given insured's described property against a certain set of loss circumstances. Without the wording, the homeowner policy could unintentionally provide much wider coverage than is justified by its premium.

LIMITATIONS OF COVERAGE

Keep in mind that additional living expenses are payable only when a covered property loss makes the premises unfit to be used as a residence. Circumstances of a particular loss determine whether an insured location can be used as a residence.

Examples: A residence may be considered:

· habitable, if fire has ruined the floor in the insured's study but the rest of the dwelling is otherwise usable as a residence.

· uninhabitable, if acrid fumes from a burned-out basement workshop make the upstairs unbearable for several days until the services of a deodorizing company can be obtained.

In other words, common sense dictates whether an insured suffers a loss of use of the residence premises.

The coverage applies to expenses necessary to maintain the household at the standard of living to which it is accustomed. Applying common sense to such losses would lead to a conclusion that a family who normally eats ground beef should not, because of a loss, seek reimbursement for a series of gourmet meals carrying astronomical price tags. An average family, temporarily forced out of their middle-class home, certainly could spend that time at an expensive resort, but not at the expense of their insurance company!

The most significant factors in loss of use are the cost of temporary quarters and the cost of eating out. Keep in mind that, in all cases, the coverage is concerned with ADDITIONAL costs. All gross expenses for temporary living and food costs would be reimbursed after deducting the insured’s regular costs (mortgage, rent, regular grocery cost) as well as accounting for discontinued expenses.

Loss Of Use coverage does not cover any loss or expense that occurs due to cancellation of a lease or agreement.

Example: Kathy Kapable rents a large, older home that includes a separate suite that she, in turn, rents to Joe Independunt (let’s assume that she has the homeowner’s permission to sub-let). Kathy is insured by an ISO HO 00 04 policy. One day, a grease fire erupts in Kathy’s part of the rented home and forces both her and Joe out of the home for two weeks. The Loss Of Use related expenses includes the following:
Kathy’s additional living expenses for two weeks	$390
Kathy’s loss of rent	$120/wk
Scenario 1: The home is cleaned and repaired and both Kathy and Joe return as occupants: Kathy is eligible to collect a total of $630 since, in this case, she suffered $390 in additional living expenses as well as $240 in lost rent. Scenario 2: The home is cleaned and repaired in two weeks, but after the first week, Joe finds another apartment and he immediately cancels his arrangement with Kathy: In this case, Kathy collects a total of $510. Why? While she still had an out of pocket additional living expense of $390, she only lost $120 of rental income. As soon as Joe’s rental obligation was canceled, Kathy would only be entitled to one week’s rent.

Interestingly enough, if the owner of the home insured the dwelling under a separate ISO dwelling policy, the owner could qualify for coverage of his/her lost rental income. In this case, the owner would suffer from losing Kathy’s rent payments.

Finally, indemnification under the three sections of Loss Of Use coverage is not limited by expiration of the policy.

Example: Let’s use Scenario 1 for Kathy Kapable again. Adding a couple of details, let’s say that the current term of her HO 00 04 policy was from 4/10 through 4/10. Let’s also say that the grease fire occurred on 4/06 and that Kathy had already arranged to switch her tenant’s coverage to another company and not renew her current policy. How much would she recover for the 4/06 loss when the policy expires four days later? Remember:

Scenario 1: The home is cleaned and repaired and both Kathy and Joe return as occupants:

Kathy is eligible to collect a total of $630 since, in this case, she suffered $390 in additional living expenses as well as $240 in lost rent.

Kathy would still collect $630 since, per the policy’s Loss of Use coverage provisions, her protection is not affected by the expiration of the policy.