Legal Definitions - loss-of-use exclusion

A loss-of-use exclusion is a specific clause found in insurance policies or contracts. It states that the policy or agreement will not cover the financial costs or damages incurred because you are temporarily unable to use your property, equipment, or facility, even if the underlying damage or event that caused the loss of use is covered.

In simpler terms, while an insurance policy might pay to repair or replace a damaged item, a loss-of-use exclusion means it will not pay for the inconvenience, lost income, or additional expenses (like renting a substitute) that arise from that item being out of commission.

• Example 1: Automobile Insurance

  Imagine your car is involved in an accident, and your insurance policy covers the cost of repairs. If your policy includes a loss-of-use exclusion, the insurance company will pay for the damage to your car, but it will not reimburse you for the cost of renting a temporary car while yours is in the repair shop. You would be responsible for that rental expense yourself, even though the accident itself was a covered event.

• Example 2: Business Property Insurance

  Consider a small manufacturing business whose primary production machine breaks down due to an electrical fault, which is a covered peril under their property insurance. If their policy contains a loss-of-use exclusion, the insurance company will likely pay for the repair or replacement of the machine. However, it will not cover the income the business loses during the week the machine is out of service, nor will it cover the cost of renting a temporary machine from another vendor to keep production going. The financial impact of the business interruption would fall solely on the company.

• Example 3: Equipment Rental Agreement

  A landscaping company rents a specialized wood chipper for a large project. The rental agreement states that the rental company is responsible for repairs if the chipper breaks down due to normal wear and tear. However, the contract also includes a loss-of-use exclusion. If the chipper breaks down and needs repairs, the rental company will fix it. But the landscaping company cannot claim compensation from the rental company for the delays to their project, the penalties they might incur for missing deadlines, or the cost of renting a different chipper from another supplier during the repair period. The exclusion prevents them from recovering these indirect costs.