Without a doubt, 2020 and 2021 have been a struggle for many landlords. The COVID pandemic caused disruptions in rent payments and evictions for non-paying tenants. Even though the government did step in to try and provide rent relief, many landlords are still left holding the bill, owed thousands in back rent. The pandemic brought into sharp focus the reality that rent payments and circumstances that affect your business are not guaranteed. That said, emergencies can occur at any time, which can diminish or even halt incoming revenue. As a landlord, it may be time to consider business interruption insurance. Join us below as we examine what this coverage is and how it can help your business in a time of need.
What is Business Interruption Insurance for Landlords?
Business interruption insurance covers the financial impact of lost income due to a covered event. Regular homeowner’s policies cover damage to the property itself. However, it does little else to help with financial losses while the property is undergoing repair. That said, business interruption insurance covers any revenue a landlord would have earned, based on financial records, had the disaster or issue not occurred. Additionally, it also covers operating expenses such as electricity, which continue even though regular activities have come to a temporary halt.
When Does Business Interruption Coverage Apply?
When unexpected events occur, the type of insurance you have can make all the difference. Business interruption insurance can step in whenever certain circumstances impact the flow of revenue from a property due to –
- Inclement Weather Damage – Severe weather such as windstorms, tornadoes, and hail are examples of events that could cause damage. Thus, requiring tenants to relocate temporarily.
- Fire – If a fire damages the unit, rendering all or a portion of the property unusable, business interruption insurance can help cover lost revenue while owners complete repairs or restoration.
- Vandalism or Theft Resulting in Unsecured Premises – Serious vandalism or a break-in that damages vital security features such as windows or doors is also covered by business interruption insurance.
- Equipment Failures – Even the most reliable appliances and equipment break down eventually. Therefore, if essential equipment or systems fail, such as the HVAC causing a tenant to relocate temporarily.
- Civil Authority Ingress or Egress – If the government mandates the closure of a business, typically due to physical damage to a neighboring property not controlled by the insured, interruption insurance can help bridge the revenue gap.
What is Not Covered by Business Interruption Insurance?
Business interruption insurance focuses on the financial implications of a covered disaster, not the actual property damage. Therefore, this type of insurance will not cover actual damage or repair costs to the property. Instead, this would need to go through a landlord’s homeowner’s policy.
Additionally, the COVID pandemic presented a unique challenge for insurance companies. While policies typically cover “civil authority ingress or egress,” the government shutdown for coronavirus led many companies to reevaluate their policies. That said, some have decided to add exclusions or special endorsements for such circumstances, otherwise known as a “COVID Exclusion,” “Business Interruption: Limited Coverage for Certain Civil Authority Orders Relating to Coronavirus,” and “Business Interruption: Limited Coverage for Certain Civil Authority Orders Relating to Coronavirus.” So, always read the policy thoroughly to see what is or is not covered and consider adding a COVID endorsement if available.
How the Policy Works
Business interruption insurance is not sold as a separate policy but instead added to an existing property/casualty policy or included in a comprehensive package policy. In addition, the premiums for business interruption insurance are typically deductible as ordinary business expenses. As with all insurance, the premiums and coverage limits can vary based on the type and location of the risk. That said, business interruption coverage can help with operating expenses which include –
- Lost Net Income (based on financial records)
- Mortgage, Rent, or Lease Payments
- Loan Payments
- Employee Payroll
What is the Restoration Period?
In general, business interruption coverage has a “restoration period.” This indicates the length of time a policy will cover financial losses due to a covered claim. There is usually a 48 to 72 hour waiting period before the restoration period begins. After that, coverage typically extends for up to 12 months. So, if the repairs are not complete before the 12-restoration period ends, the coverage and any reimbursement for lost income would expire. That said, landlords must read and understand the terms of their policy’s restoration period and any notable exclusions that may apply.
Who Pays for Business Interruption Insurance?
Business interruption insurance may sound fantastic, but with a national average cost of $1200 per year, the question remains – who foots the bill? If owners have a well-drafted lease, both landlords and tenants can split the cost of a business interruption insurance policy. If you have commercial tenants, it is good to require them to carry their own business income coverage. Thus, ensuring each party can fulfill their lease obligations in the event of a disaster.
Other Options for Landlords
Alongside business interruption insurance, there is also extra expense insurance – which could similarly reimburse landlords without purchasing additional business interruption insurance. Extra expense insurance reimburses your company for a reasonable sum of money spent over and above ordinary operating expenses. That said, keeping your business alive after a disaster often causes “above normal operating expenses.” So, there is a good chance this can help protect your business.
Extra expense insurance can also cover the costs of setting up your business in a new location. For example, a covered loss destroyed your rental office, and you needed to relocate. Therefore, this policy would cover the extra time needed to reestablish your office.
Do You Need Business Interruption Insurance for Your Rental Property?
Business interruption insurance is a must for any extensive portfolio rental business. However, expanding coverage and subsequent premiums is a considered expense for independent landlords with one or a few properties. As a property owner, 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?
- Is the cost of insurance more than you stand to lose without it?
Effectively managing a rental business through good times and bad is a significant undertaking. Anything can happen at any time, and landlords must prepare for any contingency. Savvy investors know that hiring a professional property management team is the way to go to mitigate risk and ensure their business runs smoothly. Bay Property Management Group is the area’s leading full-service rental management team focusing on helping your business weather any storm. Give us a call today to learn more.