Finding out that your insurance policy does not provide coverage for your losses is probably one of the hardest pills to swallow. For that reason, commercial property owners should pay careful attention to the landlord-tenant insurance responsibilities before entering into leasehold agreements.

A recent FC&S Bulletin exemplifies a common loss-of-rent scenario after a loss:

Loss of Rents and Business Income Loss for Multiple Insureds

We have multiple named insureds on a property policy with business income and extra expense coverage, including loss of rents. One named insured (ABC) rents all of the locations to another insured. If a business income loss occurs, can both ABC collect for its loss of rents and the other named insureds collect for their actual income loss and extra expenses?

Iowa Subscriber

Yes, the policy would allow ABC to recover for the loss of rents and the other named insureds to collect for their business income losses and extra expenses. Of course, if the other named insureds claim rent payments as part as their continuing expenses, then ABC cannot also collect for loss of rents. But if there is no overlap in what they each claim, they should all be able to recover their losses.

Consider, however, a similar situation where the outcome is entirely different. In Mirlan v. Affiliated FM Ins. Co., No. 09-55662, 2010 WL 4462728 (9th Cir. November 8, 2010), a fire rendered three tenant spaces untenantable. Under the impression that it had purchased coverage for “Loss of Rents,” the commercial property owner-corporation represented to its tenants that they would not have to continue paying rent. The tenant leases, however, provided that the tenants were required to continue paying rent even if fire made the spaces untenantable or there were repairs made to the property. The leases also required the tenants to purchase business interruption insurance. Based on the tenant agreements, the insurance carrier denied coverage for the loss of rental income sustained after the landlord agreed to abate the rent payments.

The “loss of rent” provision at issue stated in pertinent part:

[T]he actual loss of income sustained by the insured resulting directly from the necessary untenantability, caused by loss, damage or destruction by any of the perils covered herein … to real or personal property.

Although it was undisputed that the fire caused the untenatability of the rented spaces, the court found that loss of income was caused by the owner’s own conduct of abating the rent payments.