Business Interruption Insurance and Landlord Insurance Loss of Rent Cover examined
Business interruption insurance is an additional form of coverage that can be included in a business insurance policy. Many commercial landlords require their tenants to have such insurance. In the event of the temporary shut down of a business, business interruption covers continuing expenses or replaces lost profits.
General extent of cover
The standard wording of most business interruption insurance policies that we have reviewed requires the presence of three factors:
- Damage, which is usually required to be damage to the insured’s premises or physical property (for example, from fire, theft or vandalism or flooding) that was covered under the insured’s property policy.
- The damage occurs at the insured premises or situation of risk.
- The damage causes an interruption that resulted in a loss of business income
The obvious example is a situation where a fire damages business premises. Business interruption insurance is there to cover the loss of profits or revenue that occurs while the business is closed for repairs and restocking.
Obviously, the Coronavirus does not cause any damage, nor does it occur at the insured’s premises (called the “situation of risk” under many policies).
An additional clause in the business interruption section of the policy may cover an outbreak of infectious disease or contagion occurring within a certain area of the premises, provided that it results in, for example, “the closure or evacuation of the whole or part of the Situation by order of a competent public authority”.
Clauses such as this are designed to include cover for interruption as a result of outbreaks of infectious diseases such as legionnaires disease or measles. Ordinarily, however, these outbreaks are localised in nature. As such the policy will usually exclude quarantinable diseases under the Quarantine Act or Biosecurity Act.
Coronavirus has become a notifiable disease under both pieces of legislation, meaning that there is essentially no insurance protection for disruptions to business arising from Coronavirus.
Specific situations in which cover may still be available
In the absence of any cover under the general wording of the policy, it is then necessary to review other endorsements or forms of cover under the policy.
If the business holds special risks insurance then there may be possible covers for supply chain disruption or protection from the negligence, personal injury or worker’s compensation claims.
In each situation, the policy should be carefully reviewed against the claims or losses incurred by the business.
Landlord Insurance – Loss of Rent
A brief word on landlord’s loss of rent cover.
The above issues – ie, a requirement that the loss result from damage to property – are generally not relevant to the question of whether landlord’s insurance that includes cover for loss of rent. There are no exclusions for lockdown or quarantine events and in most cases, what is required is simply that the tenant has ceased paying rent.
However, your ability to make a claim under the policy may depend on the specific wording of the policy, including certain trigger events before your policy will respond.
Some policies will pay on a claim where financial loss is shown, but others will have additional requirements (as examples):
- to issue notices of default or termination to the tenant before making a claim
- that the tenant has vacated the premises before making a claim
Effect of the New Code
Under the National Cabinet Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 (the “Code”) landlords must not terminate leases due to non-payment of rent during the COVID-19 pandemic period (or reasonable subsequent recovery period).
- A member of our property and real estate team, Dan Ronan, recently published an analysis on commercial leasing principles which dissect and comments on the Code.
This will preclude a claim under many existing policies.
However, tenants must remain committed to the terms of their lease, subject to any amendments to their rental agreement negotiated under the Code and a material failure to abide by substantive terms of their lease will forfeit any protections provided to the tenant under this Code, meaning that rights of termination may become available at that time.
Warning – review your policy carefully
Do not assume that insurance cover is not available – policies are not a single standard and include many variations in wording and extent of cover. It is important to review the particular wording of the policy and consider any other endorsements or extensions of cover that may be available.
Consult with your insurer or broker, but don’t take their word for granted if cover is declined and seek second opinions where necessary.
Individual liability limited by a scheme approved under professional standards legislation (personal injury work exempted).