When the need for emergency services arises (normally in every emergency and insurance loss), the policyholder has two distinct options. The first option is the homeowner can pay for emergency repairs and other immediate expenditures directly out of his/her pocket. If you are in a comfortable financial situation, this may not impact your income and/or savings too much. The second option is to let a qualified restoration contractor work with you in order to make necessary arrangements and cover the expenses for you until your claim is settled.
If you are not in the position to be advancing payment for services and expenses, the need to retain a restoration contractor is even more important. You may be asking the question, “What’s the difference between calling a handyman out to repair my room and clean my carpet? Why would I need a restoration contractor?”
Emergency vs. Restoration Services
First off, companies that perform emergency services (for example, water shut off, boarding up of windows, temporary roof sheeting, etc.) will probably do a good job of temporary repairs, but generally are not set up to finalize permanent repairs. Likewise, most emergency service companies do not regularly deal with insurance claims, so they demand payment immediately upon the rendering of their services. If you need your roof, walls, carpeting, windows and/or flooring replaced or secured, you, the homeowner, will be paying these charges directly out of your pocket, and waiting for the insurance company to reimburse you.
The qualified restoration contractor can handle the paperwork and processing of emergency expenses under your policy for emergency services, and will be reimbursed by your insurance company, as a partial payment of your claim or advancement of claims paid. A top quality restoration contractor can perform emergency services and should not demand payment until the insurer pays for those services. This is because the restoration contractor works primarily with policy claims. Most home insurance companies would prefer the same contractor providing emergency and permanent restoration of the loss. This simplifies the claims handling and allows the insurance company to minimize its paper-shuffling and file maintenance.
Evaluating Your Home Policy For Living Expense Coverage
In addition to covering physical damage to your home, other structures, and personal property, your homeowners policy provides coverage for the loss of use of the dwelling; that is, if your home cannot be inhabited as a result of a loss that is covered by your policy, most home insurance companies will pay for the increased living expenses you will incur to maintain your normal lifestyle. You are eligible if you suffer damages to the extent that you must find substitute living quarters until the repairs to your home can be completed.
Obviously if your house has been totally destroyed “Loss of Use” coverage applies. On the other hand, if your home was only partially damaged, a determination must be made as to whether this partial damage has caused your house to be unfit to live in. Certainly the loss of vital utilities such as water or electricity would render the home uninhabitable, just as if your kitchen or only bathroom were destroyed. Minor damage or damage to your attached garage, however, may not qualify you for this type of protection. Your first step, therefore, is to come to an agreement with your claims adjuster as to whether this will apply to your specific loss. Once this is decided, you must then decide which settlement option is most advantageous.
If it is determined that your house is uninhabitable, loss of use of your home can be calculated using two methods. The first and most often utilized method is called the “additional living expense” approach; meanwhile the other is the “fair rental value” method. Although each insurance policy contains its own specific language, we will attempt to provide you with a general description of these two settlement options. Please consult your homeowner’s policy to determine your carrier’s specific requirements and method of calculation. Note: If you have fire insurance covering a home you own and do not live in, but instead rent out to others, your policy’s loss of use provision probably involves settlement under the fair rental value method.
Fair Rental Value (FRV) Method
Rather than having to identify and substantiate which of your expenses went up or down due to your loss, you may request that the adjuster determine the fair rental value of the residence which was damaged. This will require a comparison between your residences as it existed prior to the loss and similar rental properties in the area. A good source for determining the fair rental value of comparable properties is a local real estate broker who normally handles residential real estate, a leasing agent or property manager who oversees the leasing of multiple units and/or properties. If the comparable value being used is for an unfurnished property, the fair rental value of furniture should be added to the calculation.
After determining the fair rental value of your home, you then subtract any expenses that do not continue during the repair period, such as landscaping services, if this cost is actually discontinued. This figure would be the amount owed to you as fair rental value.
Even under the fair rental value method, you are additionally entitled to such things as extra transportation costs, costs of telephone or utility installation in a temporary residence, and relocation expenses. Moreover, if the insurer calculates the fair rental value of your damaged home on an “unfurnished” basis, you are entitled to the cost of renting furniture for a reasonable period of time until you purchase replacement furniture.
Additional Living Expense Method
If your primary residence has been completely or partially damaged by a covered peril making it unfit to live in, this coverage will reimburse you for the necessary increase in living expenses actually incurred by you so that your household can maintain its normal standard of living. The intent is to compensate you for the difference between what your household costs would have been had there been no loss and what your costs are because of the loss.
Explanation of Benefits
Although specific language may vary from policy to policy, the following conditions generally apply to most homeowner policies in order for the increased expenses to be eligible for payment:
- They must be necessary;
- They must result from a covered peril, such as fire, tornado, flood, etc;
- They must be incurred by the name insured; and
- They must be incurred for the purpose of continuing as nearly similar as your normal standard of living prior to the loss.
In order for your claims adjuster to properly calculate your additional living expenses, it must first be determined what your household costs were prior to the loss. Those costs include utility costs, mortgage payments, food costs, real estate taxes, laundry and cleaning costs, transportation costs, and garbage disposal service costs. If the receipts for these costs were destroyed, you should make arrangements to have duplicate copies made by your mortgage company, utility, etc. Also, credit card receipts, canceled checks, and bank statements may provide the proper substantiation of your living costs. Once these amounts are determined, they must be compared with the household expenses incurred during the repair period to assess whether you experienced an increase in your household expenses.
Typical items covered by additional expense coverage include extra food costs, increase household costs, costs of telephone or utility installation in a temporary residence, extra transportation costs due to extra mileage to and from school or work, relocation and storage expenses, and furniture rental for temporary residence.
Please not that your claim for these additional expenses must be supported with receipts that show that you actually incurred the claimed expenses. Therefore, it is important to retain all receipts that document your expenditures during the repair time. Those receipts will be evaluated against your prior bills in order to determine which expenses have actually increased. Because the Additional Living Expenses settlement option requires that all increases be supported by receipts, some situations may not be covered by this approach.
As an example, if you stay with relatives during the repair period and are not charged for rent, utilities, or food, or cannot prove that you actually incurred these expenses with a receipt, you may be unable to collect insurance proceeds under this coverage option. If your situation is similar to this scenario, or you don’t feel you will be able to substantiate all your expenses with receipts, you may decide to have your loss of use claim calculated on a fair rental value basis.
Requirements Common To Loss of Use Claims
Certain provisions apply to all types of loss of use claims under your property policy.
Time Period. Whether using the additional living expense or fair rental value method, there is a time limit on how long this coverage will last. You cannot collect on the loss of use coverage indefinitely. Payment will generally be for the shortest time required to repair or replace the damage or, if you permanently relocate, the shortest time for your household to settle elsewhere.
Therefore, you should do everything possible to ensure that reconstruction proceeds in a timely manner. Also, some policies may further restrict this protection to a 12-month period. You should consult your home insurance policy for the exact time period conditions which apply to your claim.
Policy Limit. Loss of use under your homeowners policy will also be limited to either a specific dollar amount, as stated in your policy declarations, or to a certain percentage of your dwelling policy limit.
Civil Authority. If a civil authority prohibits you from use of your residence premises as a result of direct damage to neighboring premises by an insured peril, the loss of use coverage will be limited to the time period the civil authority prohibits you from use of your residence premises.