Insurance Law Alert: Policy Language Does Not Require Existing Tenant In Order To Recover Under Lost Rents Coverage

In Ventura Kester, LLC v. Folksamerica Reinsurance Co. (No. B241889, filed 9/11/13), a California appeals court held that lost rents coverage may be payable even if the premises is not leased at the time of the loss, depending on policy wording.

In Ventura Kester, Folksamerica Reinsurance Company issued a commercial building owner’s policy insuring a premises in Sherman Oaks, California, at a time when a tenant was in possession of the property. The tenant vacated the premises and the owner subsequently negotiated to lease the property to a fitness club or office supply chain, but neither led to an executed contract. Meanwhile, thieves entered the building, stole copper wire and pipes, and caused extensive damage to the property valued in excess of $1 million. All subsequent negotiations to rent the property failed, and contractors estimated it would take another year to repair.

The building owner’s policy provided coverage for structures and for lost rents as a result of damage to a covered structure, stating: “[W]e insure you against financial loss resulting from: 1. direct physical loss of or damage to covered property caused by an accident; and. . . . 3. rents including accrued rents which become uncollectible, and extra expense incurred to prevent loss of rents, because of damage to or destruction of covered structures caused by an accident.” The policy also stated: “[T]he amount we will pay is calculated as follows:… a. your net loss of rental income; and b. rents accrued but rendered uncollectible by reason of a covered loss at a location described on the Declarations Page….”

The insurer paid for property damage, but refused to pay for lost rents because the building was vacant at the time of the loss, contending that the owner could not show that it had lost rent as a result of the property damage.

In the breach of contract and bad faith lawsuit that followed, the trial court ruled that the language of the policy did not provide coverage for lost rents when there was no tenant in the building, stating: “I just don’t think you can insure against an opportunity cost, especially one as speculative [as] here, without writing it into the policy.”

However, the appeals court disagreed, finding the policy ambiguous: “The [policy] provisions provide coverage for the loss of rents the owner would have collected, but for the property damage. Rental property is often vacant between tenants. Ventura’s policy provided coverage for damage to the building regardless of whether the property was vacant. An owner of rental property often depends on income from rent payments to cover fixed costs, such as mortgage payments, utilities, and taxes. If the building would have been rented to a new tenant but for the property damage, the owner has lost the rents that would have been received from a new tenant. Since the owner’s need for rental income and loss of rental income did not depend on having a tenant in place at the time of the covered incident, it was reasonable for the policyholder to expect the policy covered the owner’s actual lost rent as a result of the damage and did not depend on the fortuity of having a tenant in place when the damage occurred.”

The court distinguished other cases where policy language had been interpreted as conditioning lost rents coverage on occupancy. Citing Whitney Estate Co. v. Northern Assurance Co. of London (1909) 155 Cal. 521 and Certain Underwriters at Lloyd’s London v. Hogan (2001) 147 N.C.App. 715, the Ventura Kester court stated that: “If the insurer had wanted to limit the recovery or calculate the rents based on existing tenants at the time of the building damage, it clearly could have written the policy to provide that.”

However, the Ventura Kester court also found a triable issue of fact whether the vandalism damage had actually caused the loss of rents, noting evidence that the property damage did not prevent potential tenants from viewing the property, and questioning whether it was necessary to repair the damage to secure a tenant. Instead, the court pointed out that potential tenants had declined to lease the property due to the size of the building or other limitations unrelated to the vandalism damage, including unfavorable economic conditions. Thus, the court reversed summary judgment that had been granted to the insurer and remanded the case for further fact-finding on the cause of the owner’s failure to secure a new tenant.

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September 12, 2013