Loss of Use

Loss of Use - An Insurance Coverage that Handles Additional Expenses

In plain language: Loss of use is an insurance term that describes the additional expenses you might encounter when you can't use your home or vehicle because of damage that's covered by your insurance policy. 

Technical definition: Loss of use, often referred to as Coverage D in homeowners insurance, is a component of an insurance policy that covers additional living expenses incurred if a policyholder cannot reside in or use the insured property due to damages caused by an insured peril. It may also feature in auto insurance policies to fund car rental costs while your car is being repaired after a covered loss. 

Imagine a scenario where your home is damaged by a fire that your homeowners policy covers. However, the house requires extensive repairs that will take months to complete. Where do you live in the meantime? Here's where loss of use comes into play. 

TL;DR

Loss of use covers additional living or rental vehicle expenses when your property becomes unusable due to a covered claim. 

It's a key aspect of policy understanding and sales discussions for agency staff. 

A common pitfall is misunderstanding the limits and exclusions of this coverage. 

Agencies can help clients by clearly explaining the coverage and assisting in evaluating appropriate limits. 

What Is Loss of Use in Insurance?

Loss of use is a critical element of many insurance policies that addresses the inconvenience that arises when a covered peril renders your property unusable. It's commonly seen under "Coverage D" in a homeowners policy and also frequently included in vehicle insurance policies. 

In terms of homeowners insurance, loss of use coverage helps policyholders cope with additional living expenses. These may include hotel bills, restaurant meals, laundromat fees, or additional transportation costs incurred while their home is being repaired or rebuilt. 

For auto insurance, loss of use hinges on car rental costs. If your vehicle experiences a covered loss that requires repair, loss of use coverage can foot the bill for a rental car during this period. 

The goal of loss of use coverage is to help insureds maintain their normal standard of living despite the disruption caused by a covered loss. 

Key Related Terms to Know

Coverage D - the part of a homeowners insurance policy that provides for loss of use. 

EncodeValue - an unanticipated expense that's not part of your regular living costs and is covered under loss of use. 

Comparable Vehicle - a rental car similar to the insured's damaged vehicle that is covered under loss of use in auto insurance. 

Schedule Loss of Use - A type of workers' compensation benefit that compensates for the loss of use of certain body parts due to a work-related injury. 

Common Questions About Loss of Use

What kind of expenses does loss of use cover? 

Loss of use covers any additional living expenses or rental car costs necessary to maintain your usual standard of living while your property is being repaired or replaced because of a covered peril. It can include the cost of hotel stays, meals, laundry, and even additional transportation costs. 

How does the insurance company determine the amount for loss of use? 

The amount for loss of use is typically established by the policy limit for your property or dwelling coverage. It's often set at 20%–30% of the dwelling insurance limit, but policyholders may have the option to increase it. 

What does a schedule loss of use mean? 

In workers' compensation insurance, schedule loss of use refers to compensation awarded for the permanent loss of use of body parts, like fingers, hands, feet, arms, or eyesight, because of a work-related injury or occupational disease. 

Loss of Use vs. Property Damage

Property damage coverage and loss of use coverage work together to help insureds recover after a covered loss. However, they cover different aspects of the loss. 

Real Claim Examples Involving Loss of Use

Scenario 1: A wildfire destroyed a family's home forcing them to move into a hotel while the house was rebuilt. They also had to eat out and incur extra expenses for daily commutes. Their loss of use coverage covered these additional costs. 

Scenario 2: A policyholder's car was hit by another car, causing severe damage requiring weeks of repairs, during which he had to rent a car to commute to work and run errands. His loss of use coverage in his auto insurance policy covered the cost of the rental car. 

Scenario 3: A warehouse worker lost the use of his hand due to a work-related accident. His workers' compensation insurance policy's schedule loss of use benefit provided compensation for his loss. 

Limitations and Common Mistakes

Misunderstanding Coverage Limits: Loss of use coverage usually has a limit, often set as a percentage of your dwelling coverage limit. 

Not keeping Records: For loss of use claims, you need to keep detailed records and receipts of all additional costs incurred. 

Assuming all Perils are Covered: An uncovered peril that causes the property to be unusable will not trigger loss of use benefits. 

Neglecting Additional Coverage: In some cases, it may be worthwhile purchasing more loss of use coverage than what standard policies offer. 

How to Explain Loss of Use to Clients

Personal Lines client: "Loss of use is a part of your insurance policy that steps in when your home or car isn't safe or possible to use because of a covered event like a fire or storm damage. If you have to stay in a hotel or rent a car for a while, the 'loss of use' part of your policy can help pay those bills."  

Small Business owner: "In your business policy, loss of use coverage handles any extra expenses you have to bear when your business property is damaged by a covered danger and needs repair. For example, you might need to rent a temporary location or equipment." 

CFO or Risk Manager: "Loss of use coverage is a crucial contingency feature in our insurance policies. It ensures that in case of a covered incident that disrupts normal operations or use of property, the company can sustain without significant financial distress. It covers any extra incurred costs related to temporary accommodations, relocation, or vehicle rental."