Loss of rent for a serviced office

I have not been as active as in the past of late as I have simply been flooded with questions from brokers, insurers and adjusters on a draft on policy and policy interpretation issues.

While I wish I had the time to post them all, the one below I thought was appropriate to share.

This question today is regarding the way to insure the business interruption for a landlord/service provider for a barristers chambers. The question was did they need a special endorsement to define the income stream.

This is not a typical commercial lease situation as the landlord collects a fee which is made up of the rent, the barristers proportion of the outgoings, secretarial and other services.

The same situation would apply for the operator of a service office building.

I suggested for the sake of clarity that when the insurable Gross Profit was being declared that the notation be made that Section 2, Item 1: Gross Profit show Gross Profit which includes a rental component.

I suggested this so that they did not have someone inexperienced trying to argue something different at the time of a claim.

My logic for saying there was no need to change the standard definition for Gross Profit was based on the standard definition of Gross Profit in the Industrial Special Risks (“ISR”) policy which reads:

GROSS PROFIT:  the amount by which:

(a)        the sum of the Turnover and the amount of the Closing Stock and Work in Progress shall exceed

(b)        the sum of the amount of the Opening Stock and Work in Progress and the amount of the Uninsured Working Expenses as set out in the Schedule.

Note: The amounts of the Opening and Closing Stocks and Work in Progress shall be arrived at in accordance with the Insured’s normal accountancy methods; due provision being made for depreciation.”

We next need to look at what constitutes turnover. The definition of Turnover found in the Mark IV ISR reads:

TURNOVER: The money (less discounts, if any allowed) paid or payable to the Insured for goods sold and delivered and for services rendered in course of the Business at the Premises.”

This to me is sufficiently broad to cover the income earned by the Insured.

Gross Rentals where it is a normal commercial landlord, needs to have a different definition as the tenant(s) also pay money on behalf of the landlord to say a council for rates or to an insurer for building insurance. This money is not technically paid or payable to the Insured. The Gross Rentals endorsement addresses these additional payments made by the tenant on behalf of the landlord.

This client is not a normal commercial landlord as they charge a combined service fee of rent, rates, insurances, and other services all of which is paid to them and then the Insured pays the various suppliers/authorities. Therefore the standard Gross Profit and Turnover definitions work perfectly.

I am always, happy to provide opinions like this in advance so that the right insurance is in place before a loss occurs rather than be breaking bad news to an insured and their broker.