From empty shopping districts and high-rise office buildings to residential properties now repurposed as virtual offices, the U.S. real estate market has been adversely affected by COVID-19.
For those that house essential businesses or healthcare functions, the challenge is to keep employees, tenants and customers safe, and prevent the spread of the virus. For retail landlords, the pandemic has led to a loss of rental income and business interruption.
After more than two months in quarantine here in the Midwest, we’re living with more unknowns than answers. For many real estate owners and operators, the burning question is: does the closing, or partial closing, of your facility qualify as a business interruption (BI) claim?
Business interruption claims considerations for real estate operators
Unprecedented business closures have led to a growing number of BI claims in the wake of COVID-19. BI policies, which include civil authority and property coverage, are designed to cover physical loss or damage to property, often caused by a hurricane, fire or theft. They are not intended to cover a virus or pandemic. Additionally, many BI policies will contain a virus exclusion.
Because it is difficult to make a case for direct physical damage to real estate when it comes to COVID-19, claims that aren’t denied immediately are likely to play out in the courts. When it is possible to claim property damage, the question becomes: was the damaged property intended to be insured?
Attorneys will look for a number of items to be documented in a real estate COVID-19 BI claim. Was the loss of damage eminent, therefore the property needed to be secured from eminent loss or preserved, engaging the policy’s sue and labor clause? Was the property barred from use, potentially engaging the policy’s ingress/egress clause? Finally, did a civil authority, i.e. a federal, state, provincial or local government agency, prevent access to the property?
Many adjusters will argue that BI policy clauses are not triggers for coverage and will likely issue either a reservation of rights while reviewing the claim further or deny the claim outright.
If you chose to continue with filing the claim, remember to file as soon as the loss occurs, and expect reservation of rights or denial. The duty to substantiate and prove claim is on the insured. Keep track of the claim with three buckets of loss for BI: expediting expense, extra expense and BI loss of revenue and loss of rents.
Does your policy have a vacancy clause?
Real estate owners and operators should check their property policies for a “vacancy clause.” Should a property become vacant for a period of time, there’s a good chance the property coverage will change, restrict or cease. For this reason, it’s critical to notify your broker if your facility is no longer occupied to determine what actions you need to take to protect your property from loss.
Vacancy clauses are triggered 30 to 60 days after a vacancy and can modify coverage from replacement cost to actual cash value (depreciation), delete vandalism coverage from your policy or can outright cease coverage for property damage. In many policies, the difference between “vacancy” and “unoccupied” may determine coverage. Triple net properties will be the most affected by this.
In order for real estate owners/operators to minimize their COVID-19 exposure, they should consider temporarily closing common areas. In residential complexes, this will include fitness centers and community rooms. In essential businesses, this may include the break room, lunchroom, etc. Leasing staff should adhere to the government mandates. If holding showings, ask visitors to maintain a six-foot distance from each other and delay showings if anyone is feeling sick.
When facing rent loss, consider providing tenants a rent pass or deferral for the stay-at-home period, adding the deferred rent to future rent and in exchange for extending their occupancy by same time period. Additionally, consider giving tenants that miss a payment an option to add two months to the end of their lease.
Owners and operators should update “force majeure” clause, or unforeseen circumstances, in all contracts and encourage tenants to create individual business continuity and emergency pandemic plans. Finally, it is important to establish an easy way—email, post signs, text, a WhatsApp group, etc.—to communicate with all real estate tenants when municipal policies related to COVID-19 are updated, affecting the facility.
Protecting your business and employees is your number one priority. Work with your insurance broker to determine what your coverage includes and what it doesn’t ahead of filing a claim.
About the author James “Chip” Stuart is the Chief Sales Officer for HUB International of California responsible for the production sales of 50 plus offices with 350 Sales professionals. He also serves on the California Executive Management Team and oversees recruiting for over nine years with HUB.