What Additional Living Expense/Loss of Use Coverage Means to California Fire Victims

November 17, 2008

The skies are filled with smoke, and thousands of homeowners being evacuated from their homes in Southern California. It has been a weekend of devastation with the fires still ablaze. Our Saturday night’s plans changed suddenly when we spoke to our close friend, Mike, who was being evacuated from his home in Anaheim Hills and was coming to stay with us until he could return. He started asking insurance questions, and I started thinking about how complex and confusing the insurance issues are when you really have to put them to the test.

Mike’s immediate need, as is true with most of the displaced homeowners, is, “Where am I going to live?”

The simple insurance answer to that question is: “Well, you have additional living expense (ALE) or loss of use (LOU) on your homeowners policy.” That is the coverage that will pay for hotel costs. As simple as that answer may seem, it is not simple at all.

Let’s begin with the basics. The ISO Forms have for more than a decade and a half provided coverage D “Loss of Use” coverage as an automatic coverage on the HO 3 form. Older versions of the form referred to coverage D as “Additional Living Expense,” which was more restrictive. As we look at the various insurance companies providing homeowners insurance, some carriers just provide ALE.

Confusing Point #1: Does the insurance carrier providing the Homeowner’s Coverage provide “Loss of Use” or just “Additional Living Expense?”

If only ALE is provided, then, as the title of the coverage would suggest, it provides for “… any necessary increase in living expenses incurred by you so that your household can maintain its normal standard of living.” So, the form does not pay your mortgage, does not pay for your normal food bills, but only pays for those costs that are increased from your normal standard of living. Emphasis on the word “normal.”

This is true whether the policy provides just ALE or LOU. As with any form of insurance, the homeowners policy does not intend to make “you” any better than you were prior to the loss. The paragraph under “Additional Living Expense” referenced in the form begins with the lead in language “… If a loss covered under Section I makes that part of the ‘residence premises’ where you reside not fit to live in we cover…” What that lead in language in the sentence means is that you must have a physical loss, in this case fire damage, to your home in order for the homeowners policy to pay for any ALE.

But that is not what happened to Mike. His home had not been damaged. He was forced to evacuate and was not allowed to return to his home by order of civil authority. For all of the unfortunate homeowners who have moved to hotels, boarded their animals, have to eat out at restaurants — unless their home actually sustains damage the ALE will not pay.

This coverage will be available if “Loss of Use” coverage is being provided. The definition of “Loss of Use” includes: additional living expense, fair rental value, civil authority prohibiting use. It is the “Civil Authority Prohibiting Use” paragraph that provides “… If a civil authority prohibits you from use of the ‘residence premises’ as a result of direct damage to neighboring premises by a Peril Insured Against, we cover the loss as provided in
1. Additional Living Expense and
2. Fair Rental Value above for no more than two weeks.”

In plain language that means Mike has two weeks coverage for those additional costs during the time he can not return to his home — even if his home has not sustained fire or related damage.

Confusing Point #2: How much coverage is provided in the policy?

Now the questions are getting harder. There are several possible answers to that question:

Answer #1: “Loss of Use” is limited to 20 percent of the amount provided for the dwelling. This is the typical ISO language. If this is the case then there will typically be an amount shown on the declaration’s page. For example, if the amount on the dwelling is $500,000 then LOU will be $100,000. Sometimes, the declaration’s page will only show the amount on the dwelling and show the word “included” for LOU, which would then mean included typically for the 20 percent provided in the policy.

Answer #2: “Loss of Use” is written on an “Actual Loss Sustained” basis referred to by the initials ALS. The first time I ever ran across the term “Actual Loss Sustained” in this context was when the business owners policy (BOP) was first introduced in the insurance marketplace and provided actual loss sustained coverage for business income. The form went on to define the actual loss sustained as providing business income for an unlimited amount recoverable for up to a maximum of 12 months. The homeowner’s policies followed suit and started to refer to ALE/LOU as actual loss sustained. It sounds simple enough, but it’s not simple at all.

*Some insurance companies indicate ALS on the declarations page and show no time limitation on the declarations, but have a time limitation such as 12 to 24 months within the form language.

*Some insurance companies indicate ALS on the declarations page and show the time limit such as ALS (12 months maximum recovery). This is easier for an insured to understand. They see a time limitation on the declarations page and do not have to read the forms themselves. And the reality is that too often an insured only gets a declarations page for their policies as they renew coverage from year to year. They would have no way of knowing that ALS was not really unlimited.

*Some insurance companies indicate ALS and have no time limit for it either on the declarations page or in form language, which means it does not have a stopping point other than when the home is fixed or the insured has a new permanent residence. Coverage could last well beyond the 24 month period.

*Some insurance companies do not use the word ALS at all on the declarations page and may indicate included but the coverage is unlimited.

In the wake of this most recent disaster, my advice to all homeowners affected by the fires is to look closely at the language of the homeowners policy and speak with their insurance agent/company. And if you have a friend that comes to you for help, it is easier to offer a cold martini and a shoulder to cry on then quick insurance answers.

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