Business interruption recovery is typically denied if a policyholder is not able to show an actual loss of income as a result of a covered peril. Accordingly, most courts will deny recovery under a business income provision if an insured building serves as a rental property and is fully unoccupied at the time of the loss. See, e.g., Farm Bureau General Ins. v. Dynamic Land, LLC, 2009 WL 454961 (Mich. 2009)(where the court rejected the insured’s argument that it was entitled to “fair rental value” during the period of restoration because the building was unoccupied and undergoing renovations at the time of the loss and it was not able to show an “actual loss of income”).

The issue, however, is not a lost cause. The FC&S published a similar question/answer scenario where, given the right circumstances and adequate documentation, recovery may be allowed.

Business Interruption and Unoccupied Premises

My insured’s business is leasing commercial real estate. He was finalizing renovations to a newly-purchased building, and was showing it to potential tenants, when a covered water loss occurred. There is no problem with the insurance policy’s responding to the property loss, but when we submitted a claim for business interruption for the restoration period, the insurer denied coverage. The insurer’s position is that because the building was not yet leased, the insured could not have sustained a loss.

I have looked at the policy (an ISO BP 00 02 12 99), which promises to pay “the actual loss of Business Income you sustain due to the necessary suspension of your ‘operations’ during the ‘period of restoration’.” Further, business income is the “net income (net profit or loss before income taxes) that would have been earned or incurred if no physical loss or damage had occurred.”

The insurer says that there would be coverage only if the insured had a signed lease in hand. Further, the insurer adds, “New York law states that property must be rented before loss of rents can be paid.”

What is your take on this?

New York Subscriber

A review of the policy yields no exclusions. We could not find any New York statute, case law, or policy amendment that holds that a premises must be rented, or with rental imminent as documented by a signed lease. We turned to other jurisdictions. In one North Carolina case, the condominium unit owners’ policy in question (from Lloyd’s) specifically covered loss of rents, which were “new rental proceeds that would be payable to [the named insured] had the premises been occupied in accordance with ‘rental contract’.” (Certain Underwriters at Lloyd’s London v. Hogan, 556 S.E.2d 662 [N.C. App. 2001]) So, no loss of rents was payable since the unit was not rented at the time of loss.

A court in Washington addressed the issue of rental income for a bed-and-breakfast with a different outcome. Here, the policy promised to pay the “fair rental value of that part of the premises that is either rented to others or held out for rental.” The insurer tried to limit payment to the amount for rental of the entire premises as a single-family home, but the court disagreed, saying that the insured could elect payment for rental of the portion “held for rental.” The court added that the insured had to provide supporting documents and records for the claim. (DePhelps v. SAFECO Insurance Co. of America, et al., 65 P.3d 1234 [ Wash. App. 2003]).

The case that seems most applicable, however, is BA Properties, Inc. v. Aetna Casualty & Surety Company, 273 F.Supp. 2d 673 (D.C. V.I. 2003). Here, a hurricane damaged a hotel and the insured claimed a business interruption loss. There was no discussion as to whether the rooms were occupied or there were reservations in hand; the assumption was that the insured was in the business of renting rooms and the covered hurricane damage interrupted that business.

In the situation you describe, the insured is in the business of purchasing and renting commercial property. The insured can prove he has engaged in this business for some time. A covered property loss occurred. We think, therefore, that the loss is covered, but the insured must be able to prove the loss based on his past business experience (since he has none with the subject building), that is, he has a history of successfully purchasing, restoring (if necessary), and renting property.

For additional information on this topic, see The Business Interruption Book (The National Underwriter Co., Cincinnati, Ohio , 2004).