If you lose your home or business, or you simply cannot use the premises until repairs are done, your property insurance policy likely pays a benefit to cover the cost of temporary placement. These “Loss of Use” benefits typically come in two forms, Fair Rental Value and Loss of Use. The former generally pays the fair market rental value based on similar comparisons in your area, while the latter pays only the actual amounts expended to maintain a homeowner’s or renter’s standard of living. Loss of Use benefits are usually paid subject to time and monetary limits – in other words, the carrier pays on a rolling basis until it hits the maximum dollar amount (if there is one) or the maximum time limit, whichever is first.
Unfortunately, as many claimants have experienced, insurance companies are frequently attempting to come up with a basis to terminate Loss of Use coverage even before the damaged or destroyed premises are restored. Insurance companies are well known to do this by asking their vendors who estimate the cost of repair to also estimate the time for the work. These time estimates are often very short and fail to account for demand surges, permitting and planning processes, material delays, and labor shortages. Despite this, carriers will often set the end date for Loss of Use early and then make the claimant jump through hoops to get an extension. Insurance companies tend to wait until the Loss of Use period is almost expired to ask the insured to justify an extension, because it puts time pressure on the insured to act quickly or be evicted.
There is no law in place, sadly, that requires the insurance company to make a decision on extending ALE a certain amount of time in advance of the expiration date. Many aggressive or negligent adjusters even wait for the insured to be asked to leave before giving an extension. This is, obviously, insanely stressful and inappropriate.
We have seen a serious increase in carrier tactics on this front in California. It seems the carriers are doing this in response to the California Legislature increasing the mandatory minimum period of Loss of Use benefits from 24 to 36 months for losses in declared disasters. In a declared disaster loss such as a major wildfire, carriers must provide Loss of Use for a minimum of 36 months (unless the dollar limit is reached first). This was an increase from the previous required minimum of 24 months, which really did not change policies much as most already provide that amount of time. The Legislature made the changes based on experience in large wildfires where demand surge, difficulty with accessing properties and removing debris, and elongated permitting processes left many claimants still in early phases of rebuilding after a wildfire loss.
To counteract the financial consequences to insurance companies, we’ve seen them taking even more aggressive strategies to curtail ALE. Most insurance companies are seriously pressing claimants to prove that they are either actively searching for a contractor or a replacement home to continue qualifying for Loss of Use. While many carriers wait until the second year, some are getting incredibly aggressive in the very first year. And they are not backing off in many situations, even after intervention from the Department of Insurance through its complaint process. We understand the California Department of Insurance is paying close attention to how carriers are acting.
What carriers are also hoping, we suspect, is that claimants choose not to rebuild but simply buy somewhere else. Or they are assuming that more claimants will choose to do this as it becomes more and more difficult if not impossible to insure properties in the Wildland Urban Interface areas where these large wildfires occur. Not to mention, many folks do not want to return to communities that have been largely destroyed, like Paradise after the Camp Fire. Yet these are tough questions and claimants usually are not ready, emotionally, or financially, to decide whether they will rebuild or buy somewhere else right away. While the insurance companies are correct that the policies do not cover the time period it takes to make this decision, the decision itself is often predicated on how easy or difficult it is for one to get through the rebuilding process. Some carriers are sensitive to this and do not bombard the claimant with threats to terminate Loss of Use coverage early if they don’t make a decision, while others simply appear not to care.
All this leads me to my legislative proposal for California (and really, everywhere) – pass a law requiring carriers to decide to continue Loss of Use benefits well in advance of the current expiration date. Don’t let carriers put the pressure of homelessness on claimants. This is one of the most psychologically damaging things that happen to our clients.
As carriers continue to get more aggressive on Loss of Use, we will continue to get more aggressive in response. Our firm covers the entire state of California, and we have offices in several other states.