Blog Question – How best to insure loss of rent?
It is possible to insure loss of rent under the material damage or the business interruption section of an ISR, or under the fire/property or business interruption section in many business policies. We look at the alternatives and then move on to other areas of interest in the insurance of rent under appropriate headings as follows:
Insuring rent under Section 1 (Material Damage/Property/Fire) or Section 2 (Business Interruption)?
While this cover is available under the material damage section of many policies, it is not necessarily the best way to insure rent. Under the material damage, fire or property section of the policy, the cover ceases when the building is reinstated. This is fine if the tenant returns straight away. In many cases, the tenant cancels the lease and moves to new premises as part of their business recovery process. In others, the tenant’s business fails due to the fire (particularly if they themselves are not fully insured).
For these and other reasons, it is often more appropriate to insure rent under the business interruption section of the policy. Here, cover does not cease when the building is reinstated, but when the landlord’s rent returns to the pre-loss levels.
With rent do not forget to ensure that the outgoings are also insured. If the tenant has the right to temporarily cease paying rent, they will also have the right to cease paying rates, land tax and any other outgoings. If these are not insured as part of loss of rent, the landlord will have to meet the ongoing outgoings themselves.
Real Estate Agent’s Commissions
One exception to this approach may be the real estate’s agent. If this is not payable due damage to the premises caused by an insured peril, then there is no need for the landlord to insure the expense.
Special Care Required Where the Landlord and Tenant are Related Companies.
The tenant as one legal entity needs to insure loss of rent so that in the event the tenant can rent alternate accommodation while repairs to the damaged building. Insurance on rent by the tenant is achieved by not deducting rent as an Uninsured Working Expense.
The landlord, however, also needs to insure the rent so that this legal entity continues to receive the equivalent of rental income as well as the monies needed to fund any outgoings (rent, land tax and the like) which may continue even though the building is damaged so badly it cannot be tenanted. Rent therefore needs to be insured as a separate item. LMI BIcalculator explains this in greater detail in the e-Cover Calculators.
To recap, in practice an insurer can meet two claims for the one group of companies when one entity is a tenant and another is the landlord. To achieve this cover, both entities need to have rent insured.
Manning A., Business Interruption Insurance and Claims, Chapter 16.
www.bicalculator.com BI Explained.