Here’s a property insurance scenario to consider. Suppose you have the unfortunate experience of losing your house to a fire. Thankfully, you and your loved ones are unharmed. However, as the dust settles, you realize you have a lot to manage.
The challenge starts with figuring out what your living arrangements will be. The first thing you do is confer with your insurance agent and review your homeowner’s policy. It’s at that point that you realize you only have 12 months of “Loss of Use” coverage. (Note: Some policies are limited to 12 months, and others specify a dollar amount limit.)
You’ll recall from earlier SMW posts that Loss of Use coverage is designed to “maintain your normal standard of living” after a loss. Loss of Use provides coverage for the home (or condo unit) owner to rent or stay at a temporary location while the property is being repaired. It can also provide the owner with coverage for lost rental income if the property is held for rental.
Given what you might need after a house fire, it’s fair to wonder: is 12 months enough Loss of Use coverage? It’s probably not. After a fire, the claims process and repairs can often take more than one year to complete. If you’re out of your house for 18 months, it will cost a significant amount to rent a similar residence. That’s why it’s so important to look at your policy and realize how much Loss of Use coverage you have. Consider fees you might have to pay if you rent a 3- or 4-bedroom house in your town and inventory is tight. Maybe you also have to rent furniture. The costs add up quickly.
Recently we talked with an insurance agent who told us that Safety Insurance was prohibiting its policyholders from increasing their Loss of Use limit to more than 40 percent of their Personal Property limit. This is crazy! Do the math: if you have $200K for Personal Property coverage, then you would be restricted to only $80K in Loss of Use coverage. That’s nowhere near enough. In our 12-month scenario, that would limit you to approximately $6,700 per month.
Based on claims we have handled, we know that some carriers (such as Liberty Mutual and USAA) offer only 12 months of Loss of Use coverage. If you have a substantial loss, 12 months simply will not cut it. And you will also be on the hook for those additional expenses – while still paying your mortgage and other normal expenses.
Many insurance carriers offer the services of their own housing companies to policyholders who have lost their homes. While it can be beneficial – because the policyholders aren’t necessarily out of pocket (the housing companies pay this cost directly) – there are both fees and limitations. One concern is that these housing companies might not understand everyone’s specific neighborhoods and thus can’t ensure you are maintaining a similar standard of living. Also, the housing companies might only get limited time approval – as short as 3 months – from the carrier, when everyone recognizes you are out more than 3 months. This restriction limits the number of available properties, because many landlords don’t do short-term rentals – unless it’s at a big premium. In that case, the renter/homeowner gets a double expense hit.
And don’t forget – the housing companies have to get paid. They typically charge a monthly fee and a mark-up percentage for the house/apartment rental and furniture rentals. Some carriers pay these fees out of the Loss of Use limit, while others do not. If you have only limited coverage, it’s a big concern.
Another challenge that could delay construction and lengthen the period of restoration – requiring a longer stay in rental housing – is a cause and origin investigation. Say you have a hoverboard with a bad battery. This battery starts the fire that burns down the house. Understandably, the insurance company will want to seek subrogation and recover costs from the battery manufacturer. The subsequent investigation to determine the cause and origin might take months to complete. That delay (which you have no control over) could greatly lengthen the period of restoration, using a huge piece of your Loss of Use coverage before you even begin construction.
Have your agent – or your public adjuster – explain your Loss of Use coverage to you. It could make a huge difference in how you manage a major property loss.
