The COVID-19 pandemic is having a profound impact on both insurance companies and their insureds with a multitude of claims having already been made and denied. Parties that have been especially hard hit financially by the pandemic are the owners of retail shopping complexes that have multiple tenants, many of which have had to close because they are “non-essential” businesses under government emergency orders. This has resulted in a loss of rental income to these owners as landlords. While these landlords may have business interruption insurance as part of the commercial property, the pandemic is proving that whether business interruption insurance provides coverage is uncertain. This uncertainty may ultimately only be resolved by court rulings made in connection with litigation proceedings. Accordingly, given the fact that events such as the COVID-19 pandemic may occur again, commercial landlords may wish to consider rent guarantee insurance for protection.
Business Interruption Insurance
Business interruption insurance is typically not sold as a separate policy but can be obtained as a rider or endorsement to a landlord’s policy of commercial property insurance or a business owner’s policy of insurance. Business interruption insurance may provide coverage for loss rents but whether such coverage exists depends on the specific wording of the policy. This coverage is typically triggered when there is “direct physical loss” to the landlord’s property. Insurance companies have been denying claims made under business interruption policies as a result of the pandemic on the basis that there has not been a direct physical loss to the landlord’s property. Many businesses have closed, or will, in response to the COVID-19 pandemic.
Rent Loss Insurance
Leases often provide that if the leased premises are damaged by a fire or other casualty event, the tenant’s obligation to pay rent will abate during the period that the leased premises are repaired and restored. In this situation, a landlord desires to have a source of funds to replace the rent payments that it does not receive from a tenant during the period the rent abates. Rent loss insurance can be a means to cover the risk associated with the lost rent. As with business interruption insurance, however, there typically must be physical damage, e.g., fire to the landlord’s property. Further, rent loss insurance may exclude coverage for loss of rent due to certain types of damages. For example, some rent loss insurance policies do not cover water damage that creates mold because of a water leak that the landlord failed to repair. Of particular significance is the fact that that rent loss insurance pays the fair market rental value of the leased premises, which may be less than the amount of rent the tenant is obligated to pay under the lease.
Rent Guarantee Insurance
While available and used in the United Kingdom and elsewhere for many years, rent guarantee insurance is relatively new in the United States. Further, rent guarantee insurance has sometimes been viewed more as a financial product rather than risk management, i.e., an insurance product. Basically, rent guarantee insurance provides protection to landlords in the event that a tenant fails to pay rent. Specifically, this insurance pays proceeds to a landlord in the amount of the lost monthly rent. There are several key aspects of rent guarantee insurance that must be emphasized:
- Unlike business interruption insurance and rent loss insurance, there does not need to be physical damage for coverage to be provided. For example, an economic downturn may have an adverse impact on a tenant’s ability to pay full rent over a period of several months.
- This insurance can be obtained by landlords who own commercial as well as residential facilities. Thus, if a residential tenant ceases paying rent because of a job loss, there will be coverage.
- Landlords can include the cost of coverage in the monthly rents paid by tenants.
- While the length of the policy is fairly limited i.e. usually not longer than six months, this may still be sufficient to cover typical periods of time a landlord may experience a loss of rent.
- The financial condition and creditworthiness of tenants will be key factors taken into consideration by insurers in connection with the underwriting of a policy.
- The cost of a policy may be viewed as high e.g., 5-7% of the annual rent roll.
- Because of the COVID-19 pandemic, insurers may re-examine policy exclusions. For example, a policy may contain an exclusion for lost rents occurring as a result of a second wave of the pandemic but not a new pandemic or similar event.
Rent guarantee insurance is certainly not for all landlords and must be carefully evaluated in view of the benefits versus the costs. It may, however, provide valuable protection to landlords in the future. Further, lenders may wish to evaluate whether to require its commercial borrowers who are landlords to procure such insurance at the time a loan is made.
The real estate, business law, and insurance coverage attorneys at Norris McLaughlin stand ready to assist landlords, lenders, and others with insurance matters, including rent guarantee insurance. If you have any questions about this post or any related matters, please feel free to contact me at email@example.com or 484-765-2211. For more information related to COVID-19, visit our Coronavirus Thought Leadership Connection.