Most businesses can’t buy insurance against loss of income. If no one shops in a store or eats in a restaurant on a given day, the insurer won’t replace the lost income.
But landlords and building owners have a safety net unavailable to most other businesses. If a building is rendered partially or fully uninhabitable because of a covered event, such as a fire, an insurance company can help make them whole in two ways.
- The insurer will pay to repair the property damage.
- If the policy includes Loss of Rents protection, the insurer will reimburse them for the missed rents as well.
For owners of apartment and mixed-use buildings, Loss of Rents protection is an important option to consider for your building coverage. This type of coverage protects landlords against loss of income in case an insured event makes your building uninhabitable.
Income Protection for Landlords
Loss of Rents coverage is straightforward. If an insured crisis hits the building and forces tenants to move out, this type of protection will replace the monthly rent. The coverage will typically last for the duration of repairs, until the tenants move back in, or up to one year—whichever comes first.
Exceptions to Loss of Rents Coverage
Building owners with Loss of Rents coverage have nullified this protection through their own actions. In one legal case, fire damage forced three tenants to vacate the premises. Having purchased Loss of Rents protection, the owner-corporation represented to tenants they would not have to pay rent. However, the tenant leases specifically held tenants responsible for rent payments even in the case of a fire or property repairs. As a result, the insurance carrier denied the claim because the landlord agreed to waive the rental payments.
While the fire clearly caused the property to be vacated, the court found that the loss of income came from the building owner’s decision not to collect the rental payments mandated by the leases.
Note, too, that loss of rent due to owner negligence isn’t covered. If the landlord could have prevented or mitigated the potential loss, the claim may be denied. Also, some policies will pay the landlord fair market value for the rental, not necessarily what the tenant was paying. If the tenant was paying more than what the insurer considers fair market value, the landlord or owner is out the difference.
An Important Exclusion to Loss of Rents
In addition, Loss of Rents protection does not extend to tenants that default on their rental payments. That situation falls under another type of insurance.