Blog Question – Goodwill
I’ve been approached by a financier, acting on behalf of a client leasing a motel. A couple of clauses on the contract have raised concerns for the client. Email from “My client is purchasing the Leasehold to the motel, and we are lending them money to fund the purchase ($2m+). The main points involving insurance arising from the Lease are: financier as follows:
- Clauses 14.1 & 14.2 – the Landlord does not have to reinstate the Motel if it is damaged or destroyed, and accordingly, the Lease can then be terminated without compensation;
- Clause 8.1 – the Tenant (our client) must maintain insurances including building and Landlord’s Loss of profits insurance;
- Clause 8.4 – if the Motel is not to be reinstated as per Clause 14.1 & 14.2, then the insurance proceeds must be paid to the Landlord, Tenant, and others who have an interest in the proceeds.
I am assuming from these points that Building insurance will only be for the replacement value of the actual building. My question is: Is there an insurance coverage that will cover the Tenant (and us as their financier) for the loss of Goodwill in the event that the Motel building is damaged or destroyed and then not rebuilt?” It’s my understanding that this protection would not be afforded under a policy – if the Building was destroyed and the owner chose not to rebuild, then they would be paid out, but the tenant would not be Insured for advanced loss of income beyond such a payment. Is that accurate? If so can you suggest an alternative for the leaseholder? Regards Brendan [surname and email provided]
My response to Brendan ran along the lines of:
Good morning Brendan,
Thanks for your note. The loss of goodwill covers that I am aware of do not cover the loss of the original investment but rather allow the insured to purchase the good will in a similar business up to the sub-limit. See Endorsement Code GWILLXS4, simply titled Goodwill. This endorsement as shown on on page 453 and 454 in Volume 1 of my green books on the ISR – Understanding the ISR Policy reads: GOODWILL Subject to the Sub-Limit of Liability stated in the Schedule against Goodwill, in the event of Damage (other than in circumstances where cover is excluded) occurring during the Period of Insurance to any building or other property or any part thereof used by the Insured at the Premises for the purposes of the Business, which results in one of the following circumstances: (a) the rebuilding or reinstatement, whether total or partial, of the premises at the site being prohibited by, or not being commercially viable because of, any Act of Parliament or regulation made thereunder or any by-law or regulation of any municipal or statutory authority, (b) the lessor’s neglect, refusal or inability to rebuild or reinstate the Premises or to renew the Insured’s lease or monthly tenancy, (c) the refusal of any liquor licensing authority to grant an extension to carry on the Business at the Premises under the licence held by the Insured. The Insurer(s) will compensate the Insured under this Item for the cost expended by the Insured to purchase Goodwill and/or a liquor licence upon acquisition of a similar business, within a reasonable time after the Damage, less that part of any amount(s) recoverable under any other Item or Items of Section 2 of this Policy which represent(s) the actual loss sustained by the Insured resulting directly from the interruption of the Business for such additional time, beyond the period required with the exercise of due diligence and despatch to rebuild or reinstate the Damage, required to restore the Business to the condition that would have existed had no Damage occurred. GOODWILL means the future benefit from unidentifiable assets. Special Conditions 1. The Insurer(s) shall not be liable under this Item unless the Insured shall also have maintained in force an insurance on Gross Profit or Gross Revenue. 2. The Insurer(s) shall not be liable under circumstance (c) unless the Insured has used due diligence to ensure the observance of all licensing laws. 3. The insurance by this Endorsement shall not be prejudiced if any of the circumstances stated in Clauses (a), (b) or (c) of Condition 13 of this Policy arise due to the Damage. I could draft an endorsement to insure the risk identified if you or the underwriter require it.
Hope this helps.