Loss of Use of Property: The Claim and Reimbursement Process

When a covered event like a fire or significant water damage renders a home uninhabitable, you may experience a “loss of use of property.” Most standard homeowner’s and renter’s insurance policies contain provisions to address the financial consequences of these events. This coverage is designed to assist with the excess costs incurred while the home is being repaired, helping to maintain a household’s normal standard of living.

Understanding Loss of Use Coverage

Loss of use coverage, often labeled as “Coverage D” in a standard policy, consists of two distinct components. The most common is Additional Living Expenses (ALE), which covers the increase in your living costs necessary to maintain your household’s usual standard of living. ALE does not pay for all your living expenses, but rather the amount that exceeds your normal budget. For example, if your family normally spends $270 per week on groceries but now spends $370 because you are eating at restaurants, insurance would cover the $100 difference.

Common examples of expenses that fall under ALE include:

• The cost of temporary housing, such as a hotel or a short-term rental, which is comparable to your current home
• Restaurant meals if your temporary lodging lacks a kitchen
• Laundry services if you do not have access to a washer and dryer
• Fees for boarding pets if they cannot stay with you
• Furniture rental and moving costs
• Any increase in transportation expenses resulting from a longer commute

The second component of loss of use coverage is Fair Rental Value (FRV). This applies specifically to landlords or homeowners who rent out a portion of their property. If a covered event makes the tenant-occupied space uninhabitable, FRV coverage reimburses the property owner for the lost rental income. The amount is based on the fair market rent for the unit for the period it is unable to be occupied.

Required Documentation for a Claim

Before incurring any expenses, review your insurance policy, specifically the section detailing “Loss of Use” or “Coverage D.” This section will outline your specific coverage limits, which are often calculated as a percentage, between 10% and 30%, of your total dwelling coverage. Understanding these financial and time-based limitations from the outset helps in planning and avoiding unexpected out-of-pocket costs.

The most important task during displacement is to track every expense and keep all original, itemized receipts for any additional costs incurred. These documents serve as the primary evidence for your claim. An expense will likely not be reimbursed without a receipt.

To accurately calculate the additional living expenses, you must establish a baseline of your normal household spending. This involves gathering records of your typical costs before the displacement, such as past utility bills, bank statements showing grocery and transportation spending, and mortgage or rent statements. This baseline allows the insurance adjuster to clearly see the difference between your normal expenditures and the costs you are incurring due to the loss of use.

Documenting the reason for your displacement is also necessary. Take extensive photos and videos of the damage that has made your home uninhabitable. This visual evidence helps to validate the necessity of relocating and strengthens your claim.

Finally, maintain a detailed log of all communications with your insurance company. For every phone call or email, record the date, time, the name of the representative you spoke with, and a summary of the discussion. This log can be an important reference throughout the claims process.

The Claim and Reimbursement Process

The claims process begins by promptly notifying your insurance company about the loss. This initial contact initiates the claim and prompts the insurer to assign a claims adjuster to your case. The adjuster is responsible for evaluating the damage, reviewing your submitted expenses, and determining the extent of the insurer’s liability under your policy.

Following the initial notification, you will need to submit your collected documentation. This typically involves sending copies of your receipts, baseline expense records, and other supporting materials to the adjuster. The adjuster will review these submissions to ensure the expenses are reasonable, directly related to the loss of use, and fall within your policy’s coverage guidelines.

Reimbursement for loss of use is not provided as a single, upfront lump sum. Instead, payments are usually made on an ongoing basis as you incur and submit expenses. It is common to receive an initial advance to cover immediate needs like temporary shelter and clothing.

Tax Treatment of Reimbursements

The tax implications of receiving insurance payments for loss of use depend on the type of reimbursement received. For policyholders receiving Additional Living Expenses (ALE), these payments are generally not considered taxable income. The IRS views these reimbursements as a restoration of your financial position to your position before the loss, not as a financial gain.

If the insurance payment exceeds the actual additional living expenses you incurred, the excess amount may be considered income. For example, if you receive an advance for living expenses but end up spending less than that amount, the difference could be subject to income tax. It is important to accurately track all expenses to substantiate the amount of the reimbursement used.

Payments for Fair Rental Value (FRV), however, are treated differently. Since these payments are designed to replace lost rental income that would have been taxable, the FRV reimbursement is also considered taxable income. Landlords receiving these payments must report them as rental income on their tax returns.