The following article was originally posted on the American Apartment Owners Association Blog
By Lauren Lieb
As we find ourselves in the middle of the coronavirus pandemic, a lot of questions are coming up in the insurance world with regards to whether insurance policies can provide any relief to landlords for the tenant’s inability to pay. It’s unfortunately quite sobering to think of how many people have lost their jobs due to the current coronavirus pandemic. To date, unemployment claims in the United States are nearing 17 million, so it’s best to be prepared for an increasingly likely scenario in which your tenant cannot pay their rent. Would insurance cover this loss of rental income, and if so, what coverage would be needed? For landlords, it’s important to understand what is and is not covered – and why.
Am I covered for loss of rent due to the Coronavirus?
This is the big question: As a landlord, are you covered for loss of rent due to coronavirus? Business income is a coverage that is most likely included in your property policy (you may refer to it as “loss of rents”, but typically it is listed as “business interruption” or “business income” or in your insurance policy. These three terms are interchangeable for the purpose of this article). Business income provides coverage to the landlord from lost rental income due to an underlying covered cause of loss to the property.
For example, a tenant causes a kitchen fire that spreads to the two units beside it, in turn making their current unit and the two neighboring units uninhabitable, thus creating a loss of income due to the inability to lease out the damaged units. The key is that due to property damage, the units cannot be occupied for an extended period of time, while remediation is occurring. Therefore, you will typically see business income deductibles in the form of time (0 hours, 24 hours, 72 hours), instead of a standard monetary deductible. While it does depend on the specific language in the policy, most business income coverage provisions state that business income coverage must be triggered by a covered cause of loss to the property. The scenario in which a tenant is unable to pay rent (due, perhaps, to a pandemic) is not covered by business income since there is no underlying property damage triggering the coverage.
That being said, there has been some talk of Congress attempting to force insurance companies to cover lost income due to the pandemic, but thus far the attempts have not been successful for a myriad of reasons. Just on Tuesday, April 14th, the Insurance Commissioner of California mandated that insurance companies must look at and consider all business income claims. The argument is that acts of “Civil Authority” is a covered cause of loss for many insurance companies. But, the counterargument is that property policies also typically carry an “Exclusion of Loss Due to Virus or Bacteria”, and COVID-19 is a virus. So, it remains to be seen as to what insurance carriers will end up doing with the current coronavirus pandemic.
Insurance coverages evolve with the times, so it is highly likely that business income losses due to pandemics will also be an optional coverage in the future. Terrorism coverage came about shortly after 9/11, and Cyber coverage came about after the technology boom. While this won’t help many in the current predicament, it may provide a sense of relief that insurance carriers do respond to catastrophes by tailoring coverages to fit the needs of their clients.
To answer the question simply: No, your typical business income insurance would not cover your loss of rent if your tenants are unable to pay due to the coronavirus. But, there may still be options out there…
Are there other insurance solutions for loss of rents?
While standard insurance provisions may not help you now, there are a few newer insurance solutions that could be helpful in this sort of situation. These supplemental programs can cover loss of rent due to the tenant’s inability to pay, although it would be a separate coverage with an additional cost that depends on the amount of coverage that is needed.
An increasingly popular option is the establishment of a master renters insurance policy. It’s imperative that landlords require their tenants to carry renters’ insurance, mostly to protect yourself against potential claims due to the tenant-caused claims that would otherwise fall under the landlord’s policy without the layer of protection that renter’s insurance provides. But it can be more hassle than it’s worth to make sure that all your tenants are complying and not letting their coverage lapse when you’re not looking.
A master renters insurance policy is not that different than a standard renters policy. The biggest difference is that the policy is controlled by you, the landlord, so there is never a worry of whether your tenant is carrying proper coverage. Typically, for the cost of approximately $10.00 per tenant, per month (a cost that can be easily passed down to your tenant via rent collection), a master renters policy will provide a limited amount of personal property coverage for the tenant, along with the important tenant liability coverage, as well as a capped payout amount ($1,000 per tenant, per year, is normal) to the landlord to recoup lost rents due to the tenants’ inability to pay.
Another potential solution is having a separate loss of rents policy where you as the landlord can determine the coverage amount you feel is necessary. For example, you may be able to get one month, three months, or six months of loss of rent covered based on the monthly income you want covered. This is a more tailored solution to the loss of rents issue since you get to choose the income you want covered and the amount of time you want covered. However, it can be more expensive, and unlike a master renters’ insurance policy, it doesn’t include renters insurance for the tenant. For that reason, this might be better suited to a more established business, or those who don’t believe a capped payout of $1,000 per tenant per year is going to be worth it.
The more extensive loss of rents policy tends to come with some caveats for coverage to occur, so please make sure to read the specifics and ask questions about any quotes you obtain so you know exactly what you’re paying for.
The pandemic has affected people all over the globe, and it has led many business owners to wonder how they could be covered for such situations. For landlords, it’s important to examine the business income (a.k.a. loss of rent) insurance they have and take a look at including coverage for a tenant’s inability to pay rent. Insurance is a complicated thing, but here at InsuranceHub we would be more than happy to help you find the insurance solution that suits your business and coverage needs during this difficult time.