As a Baltimore landlord, you should always be prepared for challenging situations.
Think about this scenario:
One of your rental properties catches fire, which quickly spreads to the surrounding area, causing even more damage.
Maybe the fire department was able to extinguish the blaze before it completely destroyed your properties, but there’s no doubt your tenants won’t be moving back in any time soon. It could be days, weeks, or even months.
What would you do? Call it quits for your investment property business?
No. You’d call up your insurance company and tell them it’s time you benefited from your policy. And fortunately, you have the added benefit of business interruption insurance.
This kind of policy can help you get back on your feet again after disasters. Today, we’re going to cover everything you need to understand about business interruption insurance.
What is Business Interruption Insurance for Landlords?
Normally, a property insurance policy pays for damage to your property. It repairs or replaces property damaged by some sort of disaster.
But what about the financial damage that comes from not being able to generate income from that property while it is undergoing repairs or replacement? That’s where business interruption insurance comes in.
As a landlord, you need to make sure your losses are covered whenever your tenants are relieved of their obligation to pay rent when the premises are unusable. This is usually called a “loss of business income.”
Business interruption insurance covers any revenue you would have earned, based on your financial records, had the disaster or issue not occurred. It will also cover operating expenses, like electricity, that continue even though your regular activities have come to a temporary halt.
How the Policy Works
You need to be sure the policy limits are sufficient to cover your company for more than just a few days. It can take much more time than you anticipate for your business to get back on track. Plus, there’s often a 48-hour waiting period before business interruption coverage kicks in.
Business interruption insurance is not sold as a separate policy, but is usually added to a property/casualty policy or included in a comprehensive package policy.
Your premiums for business interruption insurance are typically deductible as ordinary business expenses.
The policy only pays out if the cause of the business income loss falls under your underlying property/casualty policy. Also, the price you pay for the policy is related to the overall risk of damages taking place.
For instance, the price might be higher for a restaurant than for a rental property, simply because the risk of fire is so much greater. And if you were in Tornado Alley instead of Baltimore, your premium would be much higher because of the risks in that location.
What Does Business Interruption Insurance Cover?
There are a number of major reasons why you could experience loss of business income as a landlord. Your business interruption insurance policy will pay out in the case of:
Fire: Even if the fire only destroys a portion of your rental property or your business office, you may need to close your doors or ask tenants to vacate the premises for a few weeks for cleanup.
Civil authority ingress or egress: The government may mandate the closure of a business that can directly cause loss of revenue. These result from government-issued curfews or street closures related to a covered event.
Hail: A damaged roof and busted windows might be quickly replaced, but you may have a lot of water to clean up as well, which could take days or weeks.
Windstorm: When you have to replace roofing or siding after wind damage, it can be incredibly expensive and time-consuming. And if you let tenants occupy your buildings during that time, it could place them in danger and increase your liability.
Vandalism: Sometimes, vandalism means more than a little bit of graffiti. Depending on the extent of the damage, you might be looking at a pricey and complicated repair and replacement strategy.
Equipment damage: Some of the most reliable appliances and equipment break down eventually. And because you can’t have your tenants living in a place without something like heat, you’ll have to ask them to leave until the units are replaced.
Extra Expense Insurance
Alongside business interruption insurance, there’s also extra expense insurance – which could reimburse you similarly, without you needing to purchase additional business interruption insurance.
Extra expense insurance reimburses your company for a reasonable sum of money spent over and above normal operating expenses. And because keeping your business alive during a restoration period after a disaster often causes “above normal operating expenses,” there’s a good chance they’ll help your business.
Extra expense insurance can also cover your costs of setting up your business in a new location. Say your rental property business office was destroyed and you needed to find a new spot for it on another property – all of that extra time would be covered by the policy.
Who Pays for Business Interruption Insurance?
Business interruption insurance may sound fantastic, but you probably have one big question:
Who foots the bill?
If you have a well-drafted lease, both you and your tenants can split the cost on a business interruption insurance policy – especially if your tenants operate their own businesses from their homes, or you rent out commercial property.
A smart landlord requires each tenant to carry their own business income coverage so that each party can fulfill their lease obligations in the event of a disaster. No matter what happens that affects your tenants’ ability to use and enjoy their premises, none of you should take a significant financial hit.
That way, the risk to you as a landlord is lowered, and your other tenants don’t have to suffer from an increase in their own insurance expenses – or a loss of respect for their homes and businesses.
Do You Need Business Interruption Insurance For Your Rental Property Business?
If you run a small rental property business, you may feel torn between expanding your insurance coverage and raising your insurance expenses.
On the other hand, larger rental property operations should absolutely invest in a business interruption loss policy. If your properties are not only in Baltimore but also elsewhere in the United States, you’d be wise to consider taking out such a policy because your risks of disaster are increased by far.
The best thing to do is to examine your unique risks. Do you have enough money in the bank to weather a prolonged closure? How much risk are you comfortable with?
Speak to your property management team to find out what the weak points are in your properties. What disasters could strike that might seriously damage your business?
If together you determine that business interruption insurance could be worth it, don’t waste any time waiting to add it to your existing policy. It’s hard to know when a disaster might strike, so always be prepared.