If you can't live in your house because of damage, home insurance can come to the rescue by providing funds to pay the extra expenses you have. This "loss of use coverage" is often called "additional living expenses" coverage.
It sounds straightforward, but the details can be tricky. You'll want to understand the rules of loss of use coverage so you're not hit by large, surprising bills. Here's a look at the details and what to watch out for.
The damage has to be covered by the homeowners policy
Loss of use coverage kicks in when you can't live at home due to a problem the homeowners policy is paying for, like repairs after a large fire.
An exception is if a civil authority says you have to leave, even if your home is undamaged. This could happen if nearby homes are burning from a wildfire, for example.
- The approaching problem needs to be covered by your policy in order for you to get reimbursed for extra expenses due to evacuation.
- If you can't live at home due to a problem not covered by homeowners insurance, you can't make a claim for loss of use. For example, if your home is flooded, you're on your own for extra expenses because home insurance doesn't cover floods.
- If you're simply remodeling the house and can't live in it, loss of use coverage won't apply.
It pays for "any necessary increase in living expenses"
Extra expenses you have, such as food, lodging and laundry, can be reimbursed by home insurance.
- The important word here is "increase" in living expenses. Home insurance will pay the gap between what you normally paid vs. new expenses. So if your food costs were about $300 a week when you lived at home, and now you need $500 a week, the reimbursement for food is $200 a week. Hotel bills, on the other hand, are all extra expense.
- Here's where it can get even more complicated: Insurance payments are reduced based on expenses you no longer have. For example, if you don't have utility bills for three weeks due to house damage, your normal utility costs are deducted from a loss of use payment.
It pays for your family's "normal standard of living"
If your family is used to four bedrooms and a pool, the policy should pay for a similar set-up, such as a rental similar to your house.
- But home insurance won't reimburse you for expenses that are out of whack with your normal living style. If your 1,000-square-foot two-bedroom house burns down, you'll be reimbursed for a similar rental, not a 3,000-square-foot four-bedroom house.
It has a payment limit. If you're going to tap into coverage for additional living expenses for an extended period, know the limit. The maximum is often 20% of your dwelling coverage, according to the National Association of Insurance Commissioners. So if your house is insured for $250,000, you may have a $50,000 limit for loss of use.
You can increase the limit; ask your insurance agent to give you a price quote if you're interested.
- If your insurer thinks you delayed moving back in, it won't reimburse you for expenses during the delay. For example, if your house is repaired and ready but it takes you two weeks to move back in, don't expect reimbursement for the last two weeks.
It's not meant to be indefinite
Loss of use payments continue for the least amount of time needed until the house can be lived in again, you permanently relocate or you reach the policy's limit for additional living expenses.
If you change insurance companies, loss of use payments continue under the first insurer. An insurance company is not off the hook if you switch insurers before you're back in your house. Say your house is damaged by a tornado on June 1 and will take eight weeks to repair. If you switch home insurers on June 30, the first insurer continues to pay the additional living expenses (and repairs). That's because the new insurer is not responsible for claims that started under the previous policy.
Loss of use coverage also generally pays for:
- Lost rent payments: If part of the residence is rented out, and can't be lived in, home insurance will reimburse you for the rental value that's lost while it's being repaired. This is called "fair rental value" in a standard policy.