Definition and Examples of Actual Loss
Actual loss in insurance refers to the actual costs or expenses incurred due to a claim. It constitutes the total amount that the insurance company pays for the total loss or claim based on the terms of the insurance policy.
How Does Actual Loss Work?
Actual loss can be confusing. You might receive a claims settlement of $20,000, but that may not be the actual loss. That check may only cover part of the claim that you need to be reimbursed for. There may be several parties who did work on your home and received direct payment from your insurance company, meaning you didn’t have to pay for it.
All of these amounts factor into the total actual loss. A policyholder may receive $20,000, but after totaling all amounts associated with the claim, the actual loss might be $63,300.
Actual loss is typically determined after the claim assessment is completed and the claim is closed. It will include all amounts related to the claim, including:
- Repair costs
- Additional living expenses
- Debris removal
- Storage of belongings (if applicable)
- Contractor or other expert expenses
Calculating Actual Loss in a Water Damage Claim
In the above scenario, the expected loss is $67,400. However, the actual loss is $63,300.
In the case of a significant claim, some provisions may be set up to cover rebuilding costs, for example. However, the amount paid out on the claim will not exceed the actual loss value. If the expectations are higher, the actual cost will be paid, not the anticipated cost.
Using the example above, policyholders may not have received a direct payment for the costs of cleaning their contents or debris removal. They may not even have been aware of the costs associated with these services because the service providers were paid directly by the insurance company. Even though these amounts were paid on their behalf, they should be included in the calculation of the actual loss. This total is the actual loss incurred by the claim.
Actual Loss Costs on Incurred Expenses
Actual loss costs on incurred expenses is the amount by which your expenses have increased beyond what you would normally spend, as a result of your claim.
For instance, you might have to travel an additional 20 miles to work every day while living at a different address waiting for your home to be rebuilt. The actual loss amount will include what you now spend on fuel, less what you would have normally paid before the claim. It is not merely the total amount spent while driving the extra distance to work. Actual loss is the difference or increase in costs due to the claim.
What Actual Loss Means for Homeowners
Let’s say homeowners Mary and Joe lose some shingles from their roof during a windstorm. As a result, water starts leaking into their home, and they are unable to live there while repairs are made to the living room and hallway. Additional living expenses covered on their insurance policy cover the costs of displacement and the extra costs of living in a hotel for a week while work is done on their home.
When they submit their expenses for reimbursement – while the hotel cost is fully covered – they are surprised that not all food costs will be reimbursed. The insurance adjuster explains that regular food expenditures should be factored in as part of the expense calculation. For example, they typically spend $100 per week on food. However, due to their stay in the hotel, they end up spending $400. While they won’t receive full reimbursement for $400, they will receive their actual loss, which is only $300 ($400 – $100 = $300).
Example
On Actual Loss Paid for Lost Profits
There is also the possibility of compensation for actual loss due to lost profits related to an insurance claim. Lost profits are one aspect of claims that people don’t always think about.
Here is an example of actual loss due to lost profits: The insurance company requires your presence in court to settle your claim. They are willing to cover your expenses for attending, including actual lost profits. Your employer tells you not to worry about it and to take a paid day off. Although your time is precious, if you do not incur an actual loss in profits, you will not be compensated by the insurance company.
However, if your employer did not pay you for that day, meaning you lost the value of one day’s wages. In this case, the value of the actual loss is indeed one day’s wages. In this case, the insurance policy may agree to pay for the actual loss.
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Source: https://www.thebalancemoney.com/what-is-actual-loss-2645738
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