If funds are made available, so that any failure to adequately insure all elements of the business at risk has no impact on the reinstatement period or BI loss, it may be inequitable for a technical breach of the material damage proviso to invalidate significant elements of claim.
Potential breaches of the material damage proviso may be more likely now than in the past, as recent wordings have required the material damage proviso to be applied to property (used by the policyholder) that others insure also, notably buildings insured by landlords, in addition to property owned by the policyholder.
Duplication of cause investigation work etc. is not relevant for combined policies, where the adjuster investigation relates to all sub-sections of cover; in cases of BI loss only (extensions), there is an underlying policy requirement to prove any loss subject to the terms and conditions of the policy, irrespective of the material damage proviso.
Historically, before policies became combined, the material damage proviso could be satisfied by any one of several separate covers, potentially underwritten by different insurers being triggered, for example: stock, engineering, computers, contents, buildings. Some recent wordings relate the proviso to a specific section of the combined policy only thereby producing a restriction in the way that the material damage proviso can be satisfied and reducing the breadth of the BI cover.
1.4.4Potential solutions
United States’ policy forms relate the indemnity period to a notional reinstatement period, which excludes additional/exacerbation of loss due to a lack of funds (irrespective of whether that arises due to inadequate insurance or any other cause). This could be adopted within UK-style policies.
The above suggestion is considered equitable if reinstatement is within the insured’s control. However, there is a difficulty when the reinstatement is under the control of a third party. For example, a third party may fail to carry out the reinstatement expeditiously, as a result of which the policyholder suffers extended business interruption losses. This could be addressed by including an explicit statement within the policy wordings concerning whether the exacerbation of loss caused by third parties is covered or not.
It seems appropriate to observe that adequate insurance does not guarantee timely reinstatement, and inadequate insurance does not lead directly to delay, if alternative funds are drawn upon to drive mitigation.
With regard to the issue of the duplication of investigation, the BI insurers could specify that they will rely on the investigations carried out by the material damage insurer to determine liability under the material damage claim. The findings of these investigations could then be accepted as prima facie evidence in relation to causation. The BI insurers would thus have the option to follow the material damage insurers’ decision to accept or deny liability, provided there were no other grounds on which liability might be disputed, such as a breach of a condition of the BI policy.
If the material damage proviso were altered, there would be a need to alter the wordings for BI extensions. Those extending the definition of Perils at the Premises (such as notifiable diseases, murder, etc.) present no particular difficulty, but those that extend the definition of Premises (such as customers, suppliers, utilities, etc.) require fundamental refreshment.
1.5 Rent
1.5.1Overview
There is sometimes confusion as to the scope of cover for Rent that is required. Where there is cover on a schedule, it can be unclear whether this is intended to relate to Rent Receivable or Rent Payable. For the purposes of the discussion that follows it is considered helpful to provide clarity as to the meaning of the following terms.
1.5.1.1Rent
The money paid by a lessee to the landlord for the benefit of occupying a building or part of it. The rent is usually expressed as an annual figure but is paid quarterly.
1.5.1.2Rent review
An agreement in the lease whereby the rent payable is reviewed at specified intervals. Many leases are written on the basis that the rent can never go down regardless of market conditions and many on the basis that the rent can only go up. Sometimes the increase is capped so that it cannot exceed a certain percentage. Rent reviews usually take place at five-year intervals although more frequent reviews could be agreed if it suits both parties.
1.5.1.3Service charges
This is the amount payable by a tenant for services provided by the landlord, for example, cleaning or security.
1.5.1.4Rent cessation clauses
This is the clause in a lease that enables the lessee to cease paying rent, or an equitable part of it, should the premises be damaged by defined risks to the point where the lessees’ business is affected. The risks will be defined elsewhere in the lease but usually correspond to defined risks under an all risks policy. There is a maximum period, specified in the lease (usually three years), during which the rent ceases to be payable.
1.5.2Rent Receivable
1.5.2.1Current position
Businesses for which rent is the main revenue for their business, that is, property owners, will usually have specific Gross Rental policies.
However, many businesses earn rent as an incidental part of their business; from owned buildings no longer needed by the business, from subletting of larger leased premises or as part of an investment portfolio. It is, therefore, desirable for Rent Receivable to be insured under a Gross Profit or Gross Revenue policy, as part of the income of the business.
Alternatively, Rent Receivable is sometimes insured under the material damage cover rather than BI cover, particularly in the case of landlords. It should be noted that this form of cover is not as extensive as that provided under a BI wording, because the Indemnity Period automatically ceases when the repairs are complete. If rent is insured under the material damage section, the cover ceases at reinstatement. However, if rent is covered within a gross profit item often the Indemnity Period is not aligned to the rent cessation clause; the cover will continue until the Premises are reoccupied by a tenant as opposed to being reoccupiable.
Leases commonly contain cessation clauses. In some cases, the lease will also specify a minimum period, of up to three years, after the cessation commences in respect of which landlords should insure the rental income under the lease.
Leases are subject to review at fixed intervals, at which times the rent may increase by significant amounts. In the event of a loss, unlike most Gross Profit claims, a reduction in Rent Receivable is not ameliorated by significant commensurate savings.
1.5.2.2What is the problem?
Although not an integral part of their business, many companies will receive rent payments. It is vital to include all of the constituent parts of an insured’s business that might be affected by an interruption in the policy business description. If the particular activity is not identified within the definition, the policy cannot respond to the losses incurred by that part of the business.
Consider, for example, the case of an office block owned and partially occupied by the insured for its business, with a portion sublet to a third party tenant. In the event of an interruption, unless ‘property owning’ has been \defined as part of the business description, the policy would not respond to any loss of rent receivable from the tenant.
Even if the policy has been extended
