Blog Question – Goodwill/Lease

I received this question this morning via email.

Hi Allan

Sorry to annoy you as I know you are a busy man but I’m chasing some information on Business Interruption ?

I have a potential client that is leasing a motel. He has asked the following question – I have paid $1M for a 4 year lease. I wish to take out BI cover but how do I cover my outlay if a fire destroys the building and the owner of the building decides to take the cash and not to rebuild leaving the client without a business.

Regards

Terry [surname and email provided]

My answer is:

An ISR policy and many quality business pack wordings including some for your cluster group provide cover for Goodwill as an optional benefit. A Sub-Limit is selected and premium paid on the Sub-Limit and this to me would be the answer.

This does not protect the original investment but allows the Insured to go and purchase another similar business and pay up to the Sub-Limit for Goodwill for this new business.

Having said this, I am treating this payment as Goodwill as it is unusual to be paying such a large amount of money as a one off payment for such a short period. I suppose it could be prepaid rent. If it is not Goodwill one of two things would happen. Either the landlord would have to refund the amount of prepaid rent as he has not provided the property in accordance with the agreement. If the contract has no such refund provision and it does not fall within the definition of Goodwill then you would need to do a special endorsement to cover the exposure and set an adequate Sub-Limit.

For your convenience I set out the wording of the ISR Endorsement GWILLXS4 Goodwill as follows:

GOODWILL

The Basis of Settlement clauses in Section 2 are extended to include the following provision:

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.