Loss of use

What Is Loss of Use?

Loss of use refers to the inability to use property—such as a vehicle, home, or business facility—due to damage, typically from an insured event or the negligence of a third party. It is a key concept within the broader category of insurance and legal concepts, representing the financial loss incurred when an asset becomes temporarily or permanently unavailable for its intended purpose. Insurance policies, particularly homeowners insurance and business interruption insurance, often include provisions to cover expenses or lost income associated with loss of use. This coverage aims to restore the policyholder to their pre-loss financial standing, mitigating the disruptions caused by the inability to utilize their property.

History and Origin

The concept of compensating for the inability to use damaged property has roots in common law, where individuals could seek damages for deprivation of property use due to another's tortious actions. As the insurance industry developed, provisions for loss of use were incorporated into various types of insurance policy. For instance, in property insurance, coverage for additional living expenses evolved to cover the costs incurred when a home becomes uninhabitable. Similarly, the development of business interruption insurance addressed the financial impact on businesses unable to operate due to covered property damage. Recent significant events, such as the COVID-19 pandemic, led to extensive litigation regarding business interruption claims and the interpretation of "loss of use," particularly concerning whether the absence of physical damage precluded such claims. Courts have deliberated on these issues, with some acknowledging that loss of the ability to use property, even without traditional physical damage, could trigger coverage under certain policy wordings. For example, a 2024 Court of Appeal decision in the UK confirmed coverage for COVID-19 business interruption losses where "at the premises" disease wording was present in policies.

##¹³ Key Takeaways

• Loss of use compensates for the inability to use property due to covered damage or a third party's negligence.
• It typically covers additional expenses (for personal property) or lost income (for business property).
• Homeowners and renters insurance often include "additional living expenses" as a form of loss of use coverage.
• Business interruption insurance specifically addresses lost profits and ongoing expenses during a period of non-operation.
• The actual amount recovered for loss of use often depends on policy limits, deductibles, and the specific circumstances of the loss.

Formula and Calculation

While there isn't a single universal "loss of use" formula, the calculation typically involves assessing the reasonable expenses incurred or income lost during the period the property is unusable.

For personal property (e.g., a damaged car or uninhabitable home), the calculation often involves:

Where:

• Actual Additional Expense: Costs for temporary housing, rental vehicles, extra meals, etc.
• Normal Expense: The usual costs the individual would have incurred if their property were usable.

For business property (e.g., a damaged factory), the calculation often considers:

Where:

• Lost Net Income: The profit the business would have earned during the interruption.
• Continuing Operating Expenses: Fixed costs that continue despite the interruption (e.g., salaries, rent).

These calculations are often limited by the specific terms of the insurance policy and any applicable deductible.

Interpreting the Loss of Use

Interpreting loss of use involves understanding what expenses are considered "additional" and "reasonable" for personal property, or what income and expenses are directly attributable to the interruption for businesses. For homeowners, additional living expenses (ALE) coverage, often a component of loss of use, typically covers costs beyond normal living expenses, such as hotel bills, restaurant meals above usual grocery costs, and temporary transportation. The Oregon Division of Financial Regulation provides a comprehensive list of what ALE typically covers, emphasizing the need to keep all receipts for reimbursement. The¹² goal is to allow the policyholder to maintain their normal standard of living.

For businesses, interpreting loss of use means identifying the financial loss from reduced or suspended operations. This includes not only lost revenue but also ongoing operating expenses that must still be paid, such as payroll and rent, even when the business is not generating income. The period of loss of use is generally limited to the time reasonably required to repair, rebuild, or replace the damaged property, or until the business can resume operations.

Hypothetical Example

Consider Sarah, a small business owner who runs a local bakery. A sudden, unexpected fire renders her bakery unusable for two months while repairs are underway. Sarah has a business interruption insurance policy that includes loss of use coverage.

1. Lost Income: Before the fire, her bakery generated an average net profit of $10,000 per month. Over two months, this amounts to $20,000 in lost net income.
2. Continuing Expenses: Even though the bakery is closed, Sarah still has to pay her monthly rent of $2,000 and retain her two key employees, costing $4,000 per month in salaries. These are continuing operating expenses. Over two months, this totals $12,000 ($4,000 for rent + $8,000 for salaries).
3. Additional Expenses: Sarah also incurs $500 in additional costs to temporarily store some undamaged equipment.

Her total loss of use claim would be:
Lost Net Income ($20,000) + Continuing Expenses ($12,000) + Additional Storage ($500) = $32,500.

Sarah would file a claim with her insurer, providing documentation for her pre-fire income, ongoing expenses, and additional costs incurred due to the bakery's inability to operate.

Practical Applications

Loss of use provisions are crucial in several areas of finance and law:

• Property Insurance: In homeowners insurance and renters insurance, "additional living expenses" (ALE) coverage is a direct application of loss of use. It covers costs like hotel stays, temporary housing, and increased food expenses if a dwelling becomes uninhabitable due to a covered peril (e.g., fire, storm damage). This ensures individuals are not burdened with significantly higher living costs during displacement. The Oregon Division of Financial Regulation provides a comprehensive guide on what ALE covers, emphasizing that it's for additional costs, not normal expenses.
• ¹¹ Automobile Insurance: When a vehicle is damaged in an accident, loss of use covers the cost of a rental car or other transportation for the period the vehicle is being repaired or replaced. This falls under the property damage liability of the at-fault party or the policyholder's own collision coverage. Sta¹⁰tes vary on the specifics of these claims, including whether a rental vehicle must actually be obtained for a claim to be valid.
• ⁹ Business Insurance: Business interruption insurance is designed specifically to cover loss of use for commercial entities. It compensates for lost net income and continuing operating expenses when a business cannot operate due to a covered physical loss to its property. This helps businesses survive significant disruptions. A common example involves businesses affected by governmental orders during disasters, where specific clauses in policies may or may not provide coverage.
• ⁸ Taxation: Individuals may be able to claim a casualty loss deduction for property not connected with a trade or business if the loss is attributable to a federally declared disaster. While this deduction doesn't directly compensate for loss of use, the decreased fair market value of the property due to the casualty can effectively reflect a form of "lost value" or utility. The IRS provides guidance on these deductions via Publication 547.,

#⁷#⁶ Limitations and Criticisms

Despite its importance, loss of use coverage has limitations and can be a source of dispute. One common issue arises from the interpretation of what constitutes a "covered loss." Many policies, especially in the context of business interruption, require "direct physical loss or damage" to the property. This has led to extensive litigation, particularly during events like the COVID-19 pandemic, where businesses suffered financial loss due to government-mandated shutdowns without overt physical damage to their premises. Courts have varied in their interpretations, with some denying claims if no tangible physical alteration occurred.,

A⁵n⁴other limitation is the "reasonable" period for which loss of use is covered. Insurers typically only pay for the time it reasonably takes to repair or replace the damaged property, not necessarily the actual time a policyholder is displaced or a business is shut down. Policy limits and deductible also restrict the amount of reimbursement available. Some policies may have specific exclusions, such as those for floods or earthquakes, unless explicitly added. Furthermore, personal casualty losses for tax purposes are generally only deductible if attributable to a federally declared disaster for tax years 2018 through 2025.

##³ Loss of Use vs. Additional Living Expenses (ALE)

While often used interchangeably or in close relation, "Loss of Use" and "Additional Living Expenses (ALE)" describe distinct but related concepts, primarily within the realm of property insurance.

In essence, ALE is a specific type of loss of use coverage tailored for personal dwellings, focusing on the extra expenses of temporary displacement. Loss of use, as a term, is more expansive, covering a wider range of scenarios and types of property.

FAQs

What is covered under loss of use insurance?

Loss of use coverage, often part of a standard homeowners insurance or auto insurance policy, typically covers expenses incurred when your property becomes unusable due to a covered event. For a home, this means "additional living expenses" like hotel stays, temporary rent, and extra food costs. For a vehicle, it usually covers rental car fees. For businesses, it's typically lost income and ongoing expenses.

Is loss of use the same as fair rental value?

Not entirely. While related, fair rental value is specifically the amount of rent you could have earned if you had rented out a portion of your home that becomes uninhabitable. Some homeowners insurance policies might include fair rental value as a component of their overall loss of use coverage, compensating you for that lost rental income.

Can I claim loss of use on my taxes?

Individuals generally cannot claim "loss of use" as a direct tax deduction. However, if your personal-use property is damaged due to a federally declared disaster, you might be able to claim a casualty loss deduction. This deduction is based on the decrease in the property's value, not specifically the costs of being unable to use it. Business losses, including those related to loss of use, are generally deductible as ordinary business expenses. For detailed guidance, consult IRS Publication 547.

How long does loss of use coverage last?

The duration of loss of use coverage depends on your specific insurance policy. For homeowners, it typically lasts for the "reasonable time" it takes to repair or rebuild your home, or until a specified dollar limit is reached. Auto policies usually cover a rental car for the period your vehicle is being repaired or replaced. Business interruption policies also have time limits or maximum payouts.

What if I don't rent a car while my car is being repaired? Can I still claim loss of use?

This varies by state law and insurer. Some states allow for a claim of "loss of use" even if you don't actually rent a replacement vehicle, basing the compensation on the reasonable rental value. Other states or specific insurance policy terms may require proof of actual expenses incurred, such as a rental agreement, for reimbursement. It's crucial to check your policy and state regulations.