Shelter From the Storm

A house fire can be one of the most disruptive events a family will ever face. But life must go on. A new place to reside is required pending repairs, children need to go to school, and pets need to be cared for. In these situations, homeowners affected by a loss naturally look to their insurance policy. The traditional homeowners’ insurance policy includes additional living expenses (ALE) coverage that reimburses them for additional costs incurred in resuming life following a covered loss. While the wording of the coverage form may vary, a typical ALE provision states:

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.

While the provision is usually no more than a single paragraph in length, questions about the extent of coverage abound. How is it determined if the home is uninhabitable? Assuming the home is uninhabitable, who determines the shortest period of time required to repair or replace the residence? Are the displaced homeowners required to pay ALE expenses before receiving reimbursement? Is the homeowners’ normal standard of living based on an objective or subjective standard?

If the insurer and homeowners cannot come to an agreement on these issues early in the resolution process, disputes are likely to develop that may quickly lead to a contentious claims resolution and, ultimately, to litigation with the potential for extra-contractual damages. This article explores some of the common issues with ALE claims.

Determining If the Home Is Uninhabitable

Depending on the particular coverage form, the loss must render the home uninhabitable or not fit to live in or require “the insured to leave the residence premises.” As phrased in Flores v. Allstate Texas Lloyd’s Co., “An untenantable home is one that cannot be used for the purposes for which it is intended and cannot be restored, using ordinary repairs, without unreasonable interruption of the occupancy.”

The initial requirement is clear; the homeowners must physically be out of the house for ALE coverage. A partial loss of use will not suffice. In Williams v. Auto Club Family Ins. Co., the insureds continued to live in their home following a loss but claimed they could not use certain rooms due to the damage. Because they never moved out of the home, the insureds failed to prove their residence was uninhabitable.

Does ALE apply when the home is otherwise intact but the homeowners state that adverse health conditions are present? For example, the homeowners may complain that an allergic reaction to mold renders a house uninhabitable following a minor water intrusion. The Flores court applied a “reasonable person” standard to this question. Where the homeowners claimed adverse health consequences from mold exposure in the home, the Flores court required either independent scientific study or allergy testing that demonstrates, more likely than not, that the type of mold found in the home caused adverse health effects.

Determining the Period of Restoration

ALE coverage is normally limited to the shortest time required to repair or replace the damaged portion of the premises, not to exceed the overall limit of liability, which is usually 12 months. Problems can arise when an insurer determines that the “shortest time” is less than the actual time it takes to make repairs. Claims professionals should consider factors beyond just the time required for actual construction. In Riethmuller v. Bedford County Grange Mutual Insurance, the trial court found that the insured had produced evidence of bad faith in claims handling, in part, because the claims professional did not include the month needed to arrange for bank financing and the additional month it would take the contractor to acquire materials and hire subcontractors.

A growing area of law involves delays allegedly resulting from an insurer’s failure to pay the full amount claimed. In Woodworth v. Erie Ins. Co., a New York federal court held that, as a matter of law, homeowners could potentially pursue a claim for ALE beyond the 12-month limit stated in the policy as “extracontractual consequential damages” by proving the insurer’s insufficient valuation prevented rebuilding.

 In evaluating this question, the Woodworth court looked to the nature, purpose, and particular circumstances of the insurance policy. The court reasoned that the purpose of the policy was to insure the home would be rebuilt or replaced promptly and that the displaced homeowners had the necessary financial support in the event disaster occurred. This purpose should have made the insurer aware that, if it failed to resolve the claim in good faith, thereby preventing the homeowners from rebuilding, it could be liable for ALE until such time as the home was rebuilt, regardless of the policy limit. The court’s discussion about consequential damage was stated in dicta, as the court ultimately found the plaintiffs’ claim to be untimely. Nevertheless, this dicta may later be cited by a homeowner in an attempt to expand their ALE coverage outside of its stated limit.

Maintaining the Standard of Living

The old legal maxim that insurers must take their policyholders “as they find them” also applies to ALE. What is thought of as reasonable ALE is specific to the individual homeowner. The claims professional should consider their usual routine. If a homeowner is accustomed to luxury sheets in their home, they likely are entitled to recover the cost to rent luxury sheets at the hotel. The Riethmuller court found that the homeowners had stated a cognizable claim of bad faith where the claims professional did not pay for the higher cost of a rental unit that was both in the children’s school district and that would house the family pets.

One unusual situation in an ALE claim led to a jury finding that the insurer breached its obligation of good faith and fair dealing. In Boyd v. Hartford Ins. Co., the policyholders’ new home under construction was destroyed by vandals. The family continued to reside in their old home, which they originally intended to sell prior to the vandalism, while the damaged home was being repaired. The family sought ALE for the cost of maintaining the two homes. The jury found that they were entitled to recover as ALE the cost of continuing to pay their three mortgages on the old home.

Another frequently litigated issue is whether a homeowner must first pay for ALE costs out of pocket before reimbursement. The courts have been inconsistent in handling this issue. In Hilley v. Allstate Ins. Co., a condition of ALE coverage stated that the homeowners must “produce receipts for any increased costs to maintain your standard of living while you reside elsewhere.” Because the homeowners did not submit any receipts, the insurer was under no duty to provide any ALE payments. A Texas court applied a similar ruling where the policy only covered ALE “you incur.”

This rule is not universal, however. The court in Green v. Allstate Ins. Co. applied a more equitable and liberal approach stating, “Reading the policy to require that additional living expenses be incurred prior to reimbursement would preclude those who suffer a total loss and are unable to pay for temporary living expenses from obtaining coverage for ALE.”

At first glance, an ALE claim may appear secondary to the more complex evaluation of the cost and scope of building and contents repair. An ALE claim, though, is likely more vital to the homeowners’ immediate concerns as it involves food, shelter, and increased costs for daily routines. Because of this personal intrusion, any disagreement in the area, no matter how seemingly trivial, can derail an otherwise smooth claims resolution. By setting clear expectations as to the purpose of ALE coverage and working with the homeowners to ensure that repairs are completed in a timely fashion, an insurer should be able to avoid the many complications that can arise.