ALE: Not Just a Beer
By Michael C. Perlmuter, JD, President & General Counsel
and Neal Novak, Regional Vice President
A fire severely damaged your home compelling you to move out while it is being repaired. You gather a few salvageable necessities and vacate the premises expecting your insurance policy to cover living expenses. Your insurance company says, “not so fast, buster” and directs you to the small print in the policy. Uh oh, you weren’t prepared for loopholes.
Hearing this, you drop the double-ply 30 gallon trash bag containing the few worldly possessions saved from the fire and as a result of being over tired, over wrought and under aware, silently scream:
”What living expenses can I recover from the insurance company?”
The fire may have been struck, but there remains another fear tormenting homeowners rebuilding their homes and lives in the wake of a severe property loss. You must leave your home and find a new, temporary place to live. Fortunately, your homeowner insurance policy includes the traditional Additional Living Expenses (ALE) providing coverage for reimbursement of additional expenses incurred in continuing on with your life after a loss.
Most policies have some variation of the following language:
“If a covered loss renders the residence premises uninhabitable, we will pay the required increase in living expenses you incur to maintain your normal standard of living. Payment will be for the shortest time required to repair or replace the premises; or, if you permanently relocate, for the shortest time required for your household to settle elsewhere. Payment will not exceed the limit of liability shown on the declaration page or 12 months, whichever occurs first. This period of time is not limited by the end of the policy period.”
You needn’t be an attorney to find the potential traps in the “loophole” issues written into the statement of coverage (highlighted, in red). Insurance companies refer to these as “areas of interpretation.” Overall, the content is designed to confound the homeowner and give the advantage of interpretation to the insurer.
So, let’s be like attorneys and dissect this language to assure you receive what you are entitled to whether your property is destroyed by fire or flood or hurricane or tornado or whatever peril:
First, to be entitled to ALE, the loss must be covered by the policy. Not all losses that make a home uninhabitable are covered. The loss must be one either named in your policy, or alternatively, not excluded by your policy.
Take flooding or being overrun by groundwater. Your home may be uninhabitable, but unless such damage is included in the policy, you may not be entitled to ALE.
Furthermore, even if the loss is covered, you must make sure that you are complying with all conditions precedent under the policy. Like? Like an Examination Under Oath (EUO), or other compliance with your insurance company’s reasonable investigation.
Second, the home must be in an “uninhabitable condition.”
What is uninhabitable? And can that differ from household to household?
Yes, it depends . . .
“Uninhabitable” is generally construed as “not fit to live in” and “requiring the insured to leave the residence premises.” Clearly, if the loss has caused the home to not be in compliance with local building codes or housing or habitability codes, it is “uninhabitable.” Moreover, if a home doesn’t have heat or plumbing or electric or water, it will likely be deemed “uninhabitable” and therefore the insured would be entitled to ALE.
But, here comes the “ahas.”
A) What if one part of the home is damaged (i.e. the master bedroom and bath) and the insured chooses to still live in portion of the home which are useable (i.e., other bedrooms and baths)?
In such instances, the insured would likely not recover any ALE, as he/she is still living in the home.
The homeowner must be physically out of the house; a partial loss of use will not suffice.
But what if the dryers brought in to remove moisture are oppressively loud or if the plumbing must be shut off during repairs?
Now you see where the traps begin.
B) What if the homeowner has allergies to mold, etc., and following a partial loss to the home, asserts an allergic reaction?
Usually, the courts apply a “reasonable person” standard to these questions. [That certainly helps clear things up!!!]
A court might require scientific testing that demonstrates there is mold, etc., likely to cause an allergic reaction.
C) Okay, one more . . . What if the kitchen is destroyed or perhaps the power or water is cut off to the kitchen and the homeowner goes out to eat for all meals? Now we start to get into the next area of “interpretation” of “your normal standard of living.”
Third, the ALE provision is not intended to place a homeowner in a better position than he/she enjoyed prior to the loss.
The ALE provision only becomes payable when the “normal” living conditions of the insured change and the carrier is bound to pay only the “increase” in living expense to maintain a normal standard of living. ALE does not provide payments for an insured’s regular mortgage payments or normal food bills. It only pays for costs that are INCREASED from the normal standard of living.
Importantly, this provision is enforced to the specific customs of the individual homeowner. That means, if you live in a two bedroom home, you are entitled to a two bedroom home under your ALE coverage. Your friend, who lives in a 10,000 sq. ft. six bedroom home, is entitled to replicate that lifestyle under the ALE coverage. (I hear some “not fair” grumbles, don’t I?)
Additionally, if you typically eat dinner at home every night, you are entitled to the additional cost of eating dinner out. The whole issue again gets a little “uncertain” when a family that typically eats dinner out every night wants to collect under the ALE provision for eating dinner out during the reconstruction.
Saving money is no help to an insured under the ALE coverage. The policyholder doesn’t gain from it. The insured should spend what is typically spent. Remember, “normal” is a relative term when it comes to the ALE coverage provision, so a homeowner’s regular living standards and habits will play a guiding role in determining what they are entitled to under the policy.
Fourth, how long are you entitled to payment under the ALE coverage?
If you thought the answers above were “it depends,” this one is emphatically “it depends.” The standard, according to your policy, is the “shortest time required to repair or replace” your premises.
Problems naturally arise when the insurer determines the “shortest time” is less than the actual time it takes to make repairs.
But, let’s move to even more contentious claims.
Here is your law exam question for this real property course:
The insured’s house is damaged by a covered peril and he/she is required to move out. A contract is reached with a contractor who estimates it will take six months to repair the home. However, issues develop between insured and insurer and other payments under the policy are delayed. Without those other payments, the homeowner does not have the funds to pay the contractor to begin the work. And the repair takes much longer than six months. Is the homeowner entitled to recover for the extended period of time to repair?
Now, let’s add another variable. The contractor estimates the reconstruction will take six months, but it takes the homeowner several months to arrange for bank financing to pay the contractor, thus delaying the project.
These all are questions of fact and interpretation requiring resolution on a case by case basis. There is very little case law to help, but it seems an insured is entitled to ALE for not only the construction time, but also for the time it takes to secure financing. (And you thought the “professor” would give you the answers here?)
Fifth, and this relates to the issue above, does the expense have to be already “incurred” in order to be owed by the insurer?
The purpose of ALE is to provide policyholders with the means to maintain their normal standard of living. And, it is understood ALE should be the first payment an insurer provides to an insured in order to find a comparable residence.
However, what if the insurer states it will not provide ALE payments until they are incurred? Can’t this result in a financial hardship for insureds who now are required to make double payments (both their mortgage and now their rental)?
It would appear being required to “incur” the two payments thwarts the very purpose of the ALE coverage.
Some insurers are reacting by writing policies which require proof of out-of-pocket expenses and receipts before benefits are provided.
Advances also are becoming more difficult to obtain despite the incurred hardship. The determination as to whether ALE will be paid as an advance may depend on the language of the policy and the state involved. In any case, a homeowner should document all of their expenses and request and keep receipts. Moreover, payment by check or credit card is recommended so there is a trail of money spent.
We could carry on with the “what ifs,” but don’t want to stray any further from the key points.
ALE claims are more complicated than they appear. In fact, these claims may seem secondary to the more complex evaluation of scope and measure of damages. In reality, an ALE claim is most likely an insured’s utmost immediate concern as it involves shelter and food.
Because of this uncertainty of interpretation of coverage of this immediate concern, hiring a skilled and experienced public insurance claims adjuster such as the Alex N. Sill Company, can help smooth ALE claims resolution with your insurer.
Then, knowing that your claim is in good hands, you can go out and enjoy an ALE if you are so inclined!