The benefit is designed to protect prepaid, nonrefundable reservations, including flights, hotel reservations and other bookings if the trip is canceled due to an extraordinary circumstance. Each policy will state exactly which events are considered valid reasons for cancellations.

Travel insurance can cover cancelled hotel bookings, but only if the reason for the cancellation is a "covered peril" listed in your policy. Standard reasons include sudden illness or injury (to you or a travel companion), a death in the family, or a natural disaster that makes the destination uninhabitable. If you simply change your mind or decide not to go, a standard policy will not pay out. To get coverage for any reason, you must purchase a "Cancel for Any Reason" (CFAR) upgrade, which typically costs more and only reimburses 50% to 75% of your costs. Additionally, most insurance acts as "secondary" coverage; you must first try to get a refund or credit from the hotel or booking site (like Expedia or Booking.com) directly. If the hotel has a "non-refundable" policy and you meet the criteria for a covered emergency, the insurance will then step in to reimburse your out-of-pocket losses, provided you have the documentation to prove the emergency.