Blog Question on Loss of Rent
I have received a number of questions about loss of rent leading up to the 30 June busy renewal period. This one has a common theme with many of the questions on the subject and was chosen as it expands on my post of yesterday.
What is the situation for covering Loss of Rent under and ISR MKIV where the Landlord’s property has just become vacant and the policy is about to be renewed.
The property in question is on the market to be re-leased and it will likely take some time to find a new tenant. Should the client insure loss of rent while the property is unoccupied?
Would the insurer pay for Loss of Rent if the premises were damaged and not able to be tenanted because of that damage, if this occurred during this unoccupancy period?
Karl [surname and email provided]
The business interruption (consequential loss of profits insurance to use the term in the policy) in the Mark IV Industrial Special Risks Policy is designed to put the Insured back in the same position as they would have enjoyed but for the loss.
If the Insured were to sign a lease tomorrow and the client was moving in say in September and the property burnt down in August, the client could claim the loss of rental income and the outgoings on the building under the policy from the date that the premises started earning income again.
The first question that comes to mind is, could you find yourself as the broker with a client who rents out the building and forgets to advise you that a lease has now been signed and rental income will flow from such and such a date.
The second question is, if before the lease is signed off on, the Insured and or their real estate agent has a prime candidate to rent the property and are likely to do so but before they get in to sign their is a fire. The potential tenant and the estate agent both advise that it was a done deal but with no gross rentals coverage in place there of course can be no claim.
To fully protect the client, the Gross Rentals specification, which is where I would insure such a risk, has the following Adjustments Clause:
To which such adjustments shall be made to Standard Gross Rentals and/or Annual Gross Rentals as may be necessary to provide for the trend of the business and for variations in or other circumstances affecting the Business either before or after the Damage or which would have affected the Business had the Damage not occurred, so that the figures thus adjusted shall represent as nearly as may be reasonably practicable the results which but for the Damage would have been obtained during the relative period after the Damage. [emphasis mine]
So with the benefit of this standard clause in the policy, which was included to fully protect an Insured and deliver an Indemnity under the traditional insurance definition of putting the Insured back in the same position as near as money will allow to the position they would have enjoyed but for the loss, would be able to claim rent and outgoings from the start or expected start date of the new tenant albeit there is no rental income at the start date of the policy.
So to summarise your question, neither you nor I should be making the buying decision for the client. I would explain the foregoing to the client and let them instruct you whether they wish to pay the premium, which would be effected by both the soft market and the fact the property is currently unoccupied and have cover in place should an event happen or carry the risk themselves. It comes down to the client’s risk appetite.
Having said that, if I was the client, knowing the increased risk that an unoccupied property poses, I would be insuring it.
Great question Karl and an important one for many clients at this time. I plan a further post tomorrow on the issue of un-occupancy.