Property Insurers May Be Liable to Owners for Loss of Rents Resulting from Damaged Property

Commercial property owners may recover lost rental income from their insurer if they are unable to rent out damaged property, absent clear policy exclusions.  The California Court of Appeal recently held the owner of commercial property has a reasonable expectation of coverage for loss of rent, even if the property was not leased out at the time the damage occurred.  Ventura Kester, LLC v. Folksamerica Reinsurance Company, 2013 DJDAR 12253 (September 11, 2013).  The court explained that if insurers want to limit loss of rent coverage to leases in force at the time of the damages occur, such limitations must be plainly stated in the policy.   Ventura is significant because it limits insurers’ abilities to take advantage of ambiguous policy language as a means to deny coverage.

The case involved a commercial building owner, Ventura Kester, LLC (“Ventura”), whose property and casualty insurance policy covered up to $2.76 million for structures and $552,000 for loss of rents resulting from damage to the covered structure.  The insurance company, Folksamerica Reinsurance Company (“Folksamerica”), agreed to cover “net loss of rental income” and “rents accrued but rendered uncollectible by reason of a covered loss.”  At the time the policy was issued, the commercial building was leased to a tenant.  The tenant later vacated, and Ventura sought prospective tenants, including OfficeMax, Equinox Fitness Club and Crunch fitness club.  However, before Ventura could execute a lease agreement, thieves broke into the building and stole copper wire and pipes.  Adjusters discovered additional vandalism and estimated the total cost of repair to be $1 million.  In addition, a construction company estimated the repairs would take up to one year.

Based on these assessments, Folksamerica provided Ventura with two checks for $383,989.90 and $128,973.71 to repair the damage.  However, Ventura could not begin repairs until the claim was paid in full.  Folksamerica paid Ventura $414,460.42 for property damage claims, but denied Ventura’s claim for loss of rents because no lease was in effect at the time of loss.

Following the denial, Ventura filed an action against Folksamerica for breach of contract and breach of the covenant of good faith and fair dealing.  Ventura claimed Folksamerica’s failure to pay the entire claim caused a total loss of rent in the amount of $3.8 million.  Folksamerica filed a motion for summary judgment, claiming Ventura could not establish it lost rent due to the property damage.  Ventura opposed the motion, arguing that the policy did not require an executed lease, and also that whether the lost rent was due to property damages was a triable issue of fact.  The trial court granted summary judgment for Folksamerica, stating the policy language did not provide coverage for lost rent when a building was vacant.

Ventura appealed the summary judgment, arguing the policy covers lost rents due to property damage, regardless of whether there was a tenant.  Folksamerica again asserted that Ventura was required to have a tenant in place to recover lost rent under the policy.  The California Court of Appeal reversed lower court, and awarded Ventura its costs on appeal, stating 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.

In its decision, the Court of Appeal noted that policy was ambiguous, and a reasonable policyholder would expect to recover lost rents due to property damages.  The court further explained that if an insurer wanted to limit loss of rents to periods when the property was leased, and exclude periods where the property was vacant, the insurer should have expressly stated that in the policy.  The court cited Whitney Estate Co. v. Northern Assurance Co. of London, 155 Cal. 521, 522 (1909), which permitted contracting parties to stipulate a reasonable method for computing loss of rents due to damaged and vacated property.  In Whitney, the insurance policy calculated coverage based on covered “actual loss of rent.”  Calculations of actual loss was limited to the period when the damage occurred until repairs made the building was “tenable,” and profits from rentals in place at the time of damage.  The court also recognized the validity of vacancy provisions, and noted such provisions were absent in the present policy.  Therefore, Folksamerica could not rely on MDW Enters. V. CNA Ins. Co., 4 A. D. 3d 388 (N.Y. App. Div. 2004), where an insurer’s policy clearly excluded coverage when the building had been vacant for over sixty days before the occurrence.  The Court of Appeal noted that Folksamerica’s policy did not specify such express limitations or methods of calculating loss.  Finding that the policy language failed to clearly limit coverage, the court applied a reasonable interpretation of the policy and rejected the limitation.

The Court of Appeal also determined that whether Ventura could establish actual loss of rents was a triable issue of fact.  On one hand, Folksamerica presented evidence that Ventura’s potential tenants declined to rent the building due to reasons other than property damage.  In contrast, Ventura presented evidence of a long-term lease in place prior to the damage, a list of prospective tenants, and OfficeMax’s decline to rent was due in part to the delay in resolving the insurance claim.  A trier of fact could have determined that but for the property damages, Ventura would have secured a tenant.  Therefore, the court determined summary judgment was inappropriately granted.

Ventura is an important decision because it prevented insurers from denying coverage absent clearly stated exclusions.  Although the court recognized the validity of exclusionary provisions and calculations limiting recovery, the court refused to apply Folkamerica’s broad reading of its policy.  The court’s decision adheres to established contact law principles by construing ambiguous language against the drafting party, or insurer.

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