Security Deposits for Homeowners Claims: ALE or Contents?

In residential property claims the acronym ALE stands for "Additional Living Expense." ALE is a part of the coverage that is typically provided in homeowners policies under Coverage D - Loss of Use. However, if it's a State Farm policy this coverage is provided under Coverage C - Loss of Use, and if it's a AAA or an Allstate policy then it is listed under "Other Coverages." Regardless of where the coverage may be found in your homeowners policy, almost all homeowneres policies issued in California and in other states that provide coverage for ALE include the following language, or some variation thereof, as a part of this coverage:

If a covered loss makes the insured residence unfit to live in then coverage will be provided for any necessary increase in cost incurred by you in order to maintain your and your household's normal standard of living. Payment will be for the shortest time required to restore your residence to a habitable condition by repairing or replacing the damages or, should you choose to do so, the shortest time needed for you and your household to permanently relocate.

Coverage is usually limited to twelve (12) or to twenty-four (24) months, or it is limited by a stated amount of coverage or by a stated percentage of the Coverage A - Dwelling limit. There are often other aspects of Loss of Use coverage in addition to that above, such as coverage for any lost rental income. Therefore, you should review the specific section of your policy that describes this coverage to gain a full understanding of the coverages and limits provided therein.

However, from the above quotation of what is commonly found in homeowners policies for ALE coverage, we can see that those policies with similar wording provide at least the following:

1. ALE is triggered by a covered loss (such as by an accidental fire).

2. Any increased cost necessary to maintain your standard of living, as it existed before the loss, is covered.

3. Payment for such costs is limited to the time it takes for the covered damages to be restored or for you to permanently relocate. Once either of these two events occurs, coverage ends.

4. The expense must be incurred, that is, you must 'suffer or bring on yourself ... a liability or expense' (Black's Law Dictionary, edited by Bryan A. Garner, 8th Edition [St. Paul, Minn.: West Publishing Co., 2004], page 782). This does not mean it has to have already been paid, but only that it is incurred, or that you owe it as a result of the covered loss.

Here I want to focus solely on item 2., namely, that coverage is provided for 'any increased cost necessary to maintain your normal standard of living.' In particular, I want to comment on how insurance companies typically, in fact, routinely handle requests for payment of security deposits needed in order for an insured family to relocate to a residential dwelling after a covered loss.

The normal procedure is for the insured or for his or her public adjuster to submit a lease for a similar property (similar in size, quality, and location) to what you had avaiable for use as a residence before the loss. The same procedure is followed for the rental of furniture needed by your household to maintain its normal standard of living. When your insurance company receives the leases for these items its adjsuter will review them to make sure that what you are renting is, again, within your normal standard of living. Once this question has been resolved, the insurance company will then typically pay the agreed upon term of the lease (six months, a year, etc.) under your ALE coverage. Sometimes payment for the full term of the lease is paid up-front, but many insurance companies often only pay part of the lease, even though the entire lease term has been "incurred," and then progressively monitor the time of repairs in relation to ongoing payments of the leased property.

But when it comes to payment of the security deposits for both the retnal of the dwelling and the furnishings, insurance companies typically refuse to pay them as "Additional Living Expenses" even though that is exactly what they are by policy definition which is, again, 'any increased cost necessary to maintain your normal standard of living.' Security deposits for rental of a temporary residence and for temporary furnishings needed to live in the dwelling are nothing other than increased costs necessary to maintain your normal standard of living.' Without them, you will not be able to rent the temporary residence and furnishings, and they are an increased cost to you resulting solely from the claim event. There is no sense which security deposits of this kind can be considered 'contents payments' by the definition of the coverage provided for this exposure in your policy, yet that is how most, if not all, homeowners insurers code their payments for security deposits. But why?

Insurance companies want to limit their exposure as much as possible. But that does not give them the right to put a burden on you that is theirs to carry according to the policy contract. Nevertheless, in an effort to limit their exposure when it comes to the cost of security deposits, insurance companies will generally only issue an advance for the amount of the deposit under your contents coverage. But this creates at least two unneessary problems for the insured and for his or her public adjuster:

1. Costs (security deposits) payable by definition under one coverage (ALE) are now paid and to be tracked in any claim accounting as payments under another coverage (contents), which is the wrong coverage by definition. Public adjusters must account for all payments issued as part of a claim where they represent the insured, and they are expected to make sure that the proper amounts are issued under the appropriate coverage.

2. After a severe or even a moderate property loss, it is likely that an insured and his or her family will need as much money as possible, as quickly as possible, in order to begin replacing lost food, clothing, toiletries, and other basic necessities. A complete settlement for the insured's total loss contents will have to wait until a comprehensive, fully priced inventory is completed. Though insurance companies may issue an advance for the contents total loss exposure on a claim (usually somewhere between $2,000.00 and $10,000.00), if $3,000.00-$5,000.00 or more must be used for property and for furniture rental security deposits then that does not leave the insured with much money to use in replacing numuerous items needed by the insured and by his or her family.

In discussions of these very points with certain insurance company adjusters, the company adjusters have at times pointed to occassions where their insureds have not treated the rented property or furnishings with care, which has resulted in a decreased or forfeited security deposit. But that does not change the fact that security deposits are by defintion covered under the "Additional Living Expense" or "Loss of Use" portion of the policy. It is the insurance company who must take the risk for paying out on those exposures provided for in the policy contract, for the consumers they choose to insure. Instead of advancing money under the wrong coverage to limit their exposure for possible acts by their insureds, the insurance company should pay according to the definition of coverage provided in the policy and have good faith toward their insureds.

If there is an issue with the return of the security deposits due to acts by an insured then money withheld for any Replacement Cost holdbacks for depreciation on dwellings of contents can be used to cover the amount of the security deposit that is not refunded by the landlord, or the insurance company can recover directly from their insured. But trying to cover its exposure because of poor underwriting decisions or simply refusing to pay costs under the proper exposure due a "tradition" that has developed apart from the policy contract does not make it right. It's not right to pay a claim exposure under the wrong coverage and leave the insured with less money up-front for use in replacing some of his or her lost personal property, especially during a time when the insured needs as much advance money as is possible to give.

For assistance with your property insurance claim as a whole, and in investigating and negotiating the amounts paid and withheld by your insurance company for the settlement of your claim, you should consider hiring a public insurance adjuster.

For more information about how to evaluate and hire a public insurance adjuster, choosing repair contractors, and understanding many of your rights and obligations in a property insurance claim see my book, Property Claims Adjusting: A Complete Guidebook for the Consumer, California Homeowners Edition (Murrieta, CA: Premier Claim Consultants, 2007).

For more information about public adjusters, expert witness services, property claims adjusting, appraisals, and litigation support, visit my website at http://www.premier-claim-consultants.com/.