Does your insurance cover loss of rental income?

If your commercial real estate is impacted by a disaster, whether natural or manmade, you could miss out on rental income if tenants need to shift to a new location. Here's how you can protect against lost income.

As a commercial real estate investor, your income depends on your tenants' ability to operate their businesses and pay rent. But what happens when unforeseen events force your tenants to temporarily close their doors? This is where business interruption insurance comes into play, providing a safety net for your investment.

What Is Business Interruption Insurance?

Business interruption insurance, also known as business income insurance, is a type of coverage that helps replace lost income when a property suffers damage that forces tenants to temporarily suspend their operations. This insurance is typically part of a broader commercial property insurance policy, but it can also be purchased as a separate coverage.

For commercial real estate investors, business interruption insurance can help cover lost rental income during the period when your property is being repaired or rebuilt after a covered event. This coverage ensures that you can continue to meet your financial obligations, such as mortage repayments, property taxes, and other expenses, even when your tenants are unable to pay rent due to a temporary closure.

What Does Business Interruption Insurance Cover?

Business interruption insurance typically covers:

1. Lost rental income: The amount of rent you would have received if the property had not been damaged.
2. Fixed costs: Ongoing expenses such as mortgage payments, property taxes, and utilities.
3. Extra expenses: Additional costs incurred to minimize the suspension of business operations.

It's important to note that business interruption insurance usually kicks in after a waiting period, typically 48 to 72 hours after the covered event occurs.

When Does Business Interruption Insurance Apply?

Business interruption coverage is triggered when your property suffers physical damage from a covered peril that forces your tenants to suspend their operations. Common covered perils include:

• Fire or smoke damage
• Windstorms or hail
• Lightning strikes
• Explosions
• Vandalism

It's crucial to review your policy carefully, as certain events like floods or earthquakes may be excluded unless you have specific coverage for these perils.

The Importance of Business Interruption Insurance for Commercial Real Estate Investors

For commercial real estate investors, business interruption insurance offers several key benefits:

1. Income protection: It helps maintain your cash flow when tenants are unable to pay rent due to property damage.
2. Financial stability: Ensures you can meet your financial obligations even when rental income is disrupted.
3. Competitive advantage: Offering this coverage can make your property more attractive to potential tenants.
4. Peace of mind: Provides reassurance that your investment is protected against unforeseen events.

Factors to Consider When Purchasing Business Interruption Insurance

When selecting business interruption insurance for your commercial property, consider the following factors:

1. Coverage limits: Ensure the coverage is sufficient to replace your lost income for an adequate period.
2. Indemnity period: This is the length of time the policy will pay out benefits. Choose a period that realistically covers the time it would take to repair or rebuild your property.
3. Waiting period: Understand how long you'll need to wait before the coverage kicks in after a covered event.
4. Additional coverages: Consider adding endorsements like utility interruption coverage or civil authority coverage for more comprehensive protection.