This important coverage is designed to bring you some stability after an accident. How does loss of use work in insurance?
How does loss of use work in insurance?
Loss of use coverage allows your insurance to temporarily step in to help you maintain your standard of living if you can no longer use an insured asset.
If you’re a driver, homeowner, or renter with insurance, you might have come across loss of use coverage in one of your insurance policy documents. Let’s review what loss of use coverage means for different lines of insurance.
Loss of use coverage in:
If you hold loss of use coverage as part of your auto insurance policy, this essentially translates to rental car reimbursement if your vehicle is out of commission while undergoing repairs after an incident. This coverage is not included in policies by default like liability coverage is — you would need to opt-in — but is typically not an expensive addition. Loss of use car insurance coverage may be cost-effective if you rely on your vehicle for daily commuting and other responsibilities, and would rather not deal with the inconvenience of going without a vehicle if your car is damaged.
A loss of use claim follows your original accident claim. Once you drop off your car for repairs, your insurance company would pay for your substitute transportation costs. Insurers typically set their own coverage limits — usually by putting a cap on the number of days or providing a per diem amount for the rental, like $50 per day.
Your insurance company would expect you to choose a reasonable rental vehicle, comparable to the one you already own and insure. An insurance company can deny your loss of use claim if, for example, you choose a luxury sportscar as your rental while your Corolla is getting fixed.
Also known as additional living expenses or Coverage D in insurance-speak, loss of use coverage is part of a standard homeowners insurance policy. It covers your living expenses if your home is deemed uninhabitable following a covered loss, and you need to find temporary housing — like a hotel — elsewhere. It’s meant to help you retain your standard of living while you’re living away from home, and will cover expenses incurred while your home is being repaired or rebuilt.
The coverage limit for additional living expenses is typically 20% or 30% of your dwelling coverage limit — also known as the insured value of your home. This may vary depending on your insurance company and policy. So if your house is insured for a value of $500,000 on your homeowners policy and your loss of use is 20% of your dwelling coverage, you’d have $100,000 to spend on living expenses.
You can generally expect your insurance to pay for the following accrued loss of use expenses.
- Hotel or motel stay
- Food, groceries, restaurant bills
- Storage fees
- Parking fees
- Pet boarding
Just because you have a certain amount of living expenses covered by loss of use insurance does not mean you can go on a shopping spree and expect to be reimbursed. Insurance is meant to make you “whole” after an accident, restoring exactly what you’ve lost and nothing more. Your expenses should not be too far removed from what you’d spend in your day-to-day life — insurers typically have strict limitations on what they will pay for and what they won’t.
An insurance company may even impose dollar limits on specific, “necessary” categories of expenses, like lodging, to discourage policyholders from choosing pricier accommodations more likely to rapidly bring expenses up to coverage limits. Insurers can also limit the total number of days for which this coverage will apply. Retail all receipts since you will need to provide proof that you paid these expenses in order for your insurance company to reimburse you for your loss of use claim.
If you’re a landlord or part of your multi-family dwelling is used as a rental property for tenants, loss of use coverage can help you recover lost rental income — also known as fair rental value — while your tenant resides elsewhere.
Renters insurance protects you and your personal property, and will also pay for your living expenses if your rental unit becomes unlivable after a covered peril. Loss of use is a default insurance coverage in a typical renters insurance policy. The limit is set by your insurance company — it can be a certain number of months or the period of time it takes for you to move elsewhere permanently or repair or replace the damage — whichever is shortest.
You would need to consult with your renters insurance provider for an accounting of the specific things your policy will cover. Some common expenses covered by renters insurance loss of use:
- Hotel or motel stay
- Food, groceries, restaurant bills
- Credit check fee for finding a new rental
As in the case of loss of use for homeowners insurance, your renters insurance provider will expect you to stay in accommodations comparable to your previous living situation. Don’t plan on staying at a luxury resort while you’re looking for a new one-bedroom apartment to move into.
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