A Home After the Storm
How does additional living expense coverage respond to insureds impacted by hurricanes?
Hurricane Harvey recently displaced more than 1 million people, and news reports indicate that it left behind wreckage over an approximately 300 mile area. Hurricane Irma caused an estimated 6.5 million people to evacuate the storm in Florida. Victims of both hurricanes could not access their homes and stayed in hotels and other temporary housing as they awaited repairs and return of normal utility services.
When catastrophes like these strike, homeowners will naturally look to their insurance policies to assist with the increased costs of living outside of their homes, including housing, food, and travel. Let’s look at how the additional living expense (ALE) coverage in a traditional homeowner’s insurance policy responds to these circumstances.
ALE coverage is designed to reimburse homeowners for reasonable increases in living expenses necessary to maintain their normal standards of living when a covered loss makes their residential premises uninhabitable. The coverage usually continues until a reasonable time has passed for the repair of the damaged premises or, if the homeowner permanently relocates, for the shortest time required to settle the household at a new location. The particular wording of an insurance policy may impose additional restrictions of this coverage.
For Texas residents, courts have determined that a house is deemed to be “uninhabitable” when it cannot be used for the purposes for which it is intended and cannot be restored using ordinary repairs without unreasonable interruption of the occupancy, as seen in Flores v. Allstate Texas Lloyd’s Co. Florida, however, requires that the homeowner must be forced out of the property due to a covered loss, as noted in Bankers Sec. Ins. Co. v. Brady. Stated differently, the purpose of the “loss of use” coverage is to make whole a displaced homeowner, as affirmed in Highlands Ins. Co. v. Kravecas.
Debates frequently arise between the homeowner and insurer as to whether or not a house is uninhabitable following a loss. In the case of Williams v. Auto Club Family Ins. Co., the homeowners argued that the house was rendered uninhabitable by Hurricane Katrina because there was no power in the house, even though the roof, walls, windows, and doors were all intact. The homeowners only made minor repairs after returning to their house, mostly limited to the garage and the HVAC unit. By definition, to be uninhabitable, the house would have to be unable to be lived in by the homeowners. Although the homeowners claimed that certain living spaces were not “fit for habitation,” such as the master bath that had not been used since Hurricane Katrina, the court found that this does not render “the part of the residence premises where you reside not fit to live in,” as the house had been inhabited with little-to-no repairs following the hurricane. Further, the court determined that the house was not rendered uninhabitable due to the absence of electricity because the policy did not provide coverage for interruption of electric service.
Another interesting issue is whether a homeowner is entitled to ALE coverage for evacuation expenses incurred before the storm hits. For example, many Florida residents fled the area before Hurricane Irma struck either by voluntary or mandatory evacuation orders. What if a resident flees before the hurricane hits, but the house luckily avoids any damage? On its face, ALE coverage should not provide pre-storm evacuation expenses because the coverage is not triggered until a covered loss renders the house uninhabitable. In other words, the mere threat of a hurricane does not render a house unfit for habitation. Some policies, however, provide an exception if the house is not accessible due to civil authority or government mandate. Insurance policies may pay ALE for up to two weeks when a homeowner is prohibited from use of their house because of civil authority under these circumstances.
In light of coverage limits for certain types of losses in insurance policies, there may be a question as to the true reason why the homeowner vacated the house when different types of losses occur concurrently (for example, if a house is damaged from both a flood and windstorm). In the case of Kurland v. ACE Am. Ins. Co., the house sustained water damage partly due to a leaky roof. The water damage also caused mold to grow, including inside the HVAC system. The homeowners vacated after mold was detected inside the residence. The policy capped ALE coverage incurred because of the presence of mold in the house at $2,000, but imposed no such limit if the homeowners moved out of the house for some other reason. The insurance company asked the court to determine if the homeowners moved out solely because of mold, or if other covered losses—such as water damage—also made the residence uninhabitable. The court noted that if the homeowners would have had to move out anyway, even absent the presence of mold, then they may be entitled to more than $2,000 in ALE. The homeowners argued that many reasons compelled them to move out, including mold, water damage, equipment breakdown, and the presence of “chemicals and toxins in the home.” The court found that this presented an issue of fact for the jury to resolve as it could not decide the issue on the papers before the court.
The phrase in the typical ALE provision of limiting coverage to the “shortest time required to repair or replace the damage or, if you permanently relocate, the shortest time required for your household to settle elsewhere,” is intended to put a reasonable limit on the length of time that the insurer is required to provide benefits. In Christmas v. Nationwide Mut. Ins. Co., the homeowner argued that the “shortest time required to repair or replace the damage” had not expired because she did not have sufficient funds to repair the house. The North Carolina court rejected this argument, finding that the provision does not condition the ALE coverage on the payment of the replacement cost of the property. The court construed the natural reading of the ALE coverage to mean that the insurer will pay living expenses for the shortest time period required to repair the property or permanently relocate generally, “without regard to the insured’s financial ability to fully rebuild the damaged property.” In Taladay v. Metropolitan Group Prop. and Cas. Ins. Co., a court in Washington, using its rules of contract interpretation, rejected the North Carolina’s court reasoning in Christmas, finding that the court had added conditions not expressly stated in the insurance policy. Instead, the Taladay court interpreted the meaning of the time required to repair the damaged property to include the actual circumstances and not simply an estimate of construction time. Consequently, the time spent to assess the damage, participate in an appraisal process, wait for the insurer to issue payment, and complete the repairs on the structure could also be factored into the analysis.
In the context of a hurricane that damages a widespread area, it can lead to shortages of building materials and labor that may increase the time and cost required to repair the damaged property beyond what is normally expected. This situation may require the claims professional for the insurance company to review construction industry data and other local factors to calculate the reasonable time required to repair or replace the damaged property, given the impact of the storm.
The homeowner, of course, cannot profit or otherwise receive a windfall from the ALE coverage. In one case, Thompson v. State Farm Fire & Cas. Co., the homeowner sought the cost to move into a new apartment, where the rent in the new apartment was less than the amount they paid before Hurricane Katrina. The court held that to the extent that the homeowners sought coverage for rental costs that were less than those of their insured premises, the homeowners could not recover.
An ALE claim only belongs to the insured who actually experienced the loss of use of a house. In the Kravecas case, the plaintiff purchased a house damaged by Hurricane Andrew. The buyer attempted to assert his own claim for loss of potential use instead of asserting the prior owner’s claim for actual loss of use. The court determined it would create an unwarranted windfall if the third-party buyer could assert a claim for the potential loss of use, as he had never been a resident on the premises.
In conclusion, ALE coverage is a useful and helpful tool to a homeowner seeking to return normalcy to life following a catastrophic event such as a hurricane. The coverage should be reviewed carefully by both the claims professional and the homeowner to ensure that their actions in finding new housing, decisions about repairs, and the timing of returning to the house are in accordance with the insurance coverage. The time limitation on ALE coverage can become tricky in the context of a hurricane, where it can take a longer period of time to return to the house and locate a suitable contractor and building materials. In these circumstances, the claims professional may have to study the actual conditions as opposed to relying wholly on a construction estimate.