October has its own claim to pop culture infamy: the annual scarefest known as Halloween. How appropriate that one of my latest email queries contained a scary assumption:
Let's say you have a property policy, where you have the building owner and tenant listed on the same policy. They are one and the same when it comes to ownership. The only difference here is that we have two different corporations listed on this policy. We cover the building in the name of the one corporation and we cover the BPP in the name of the other corporation. We have an application that lists both corporations, one as the building owner and the other as whatever the business is. We have a written lease where the tenant is paying the building owner rent every month, too. Will the business income and extra expense limit include the loss of rents for the building owner, or do I need to have two different coverages? Should the property application look like building, and loss of rents for the building owner show the BPP limit for the tenant (who is the same owner) with the business income and extra expense exposure?
This question is not uncommon. Insureds often create interesting legal and contractual blurred lines, typically for purposes having little to do with what would make insurance easier to write. But the agent added his own word crimes to the client's blurred lines, creating the potential to turn mere confusion into a truly scary E&O. Aalthough the underwriters should know better, perhaps they can be cut a bit of slack about those weeds when the agent may have led them into the swamp. To reveal how, reverse the order of the second and third sentences, then consider them one at a time: The only difference here is that we have two different corporations listed on this policy.
We have two different corporations listed on the policy—one as building owner and one as the tenant. These separate corporations have formalized their arrangement and rental agreement via a lease.
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Corporation ABC (building owner). At time of covered loss, ABC needs business income coverage for potential rents loss. One exception occurs if the lease requires tenant corporation XYZ to continue paying rent if the building is uninhabitable. In that case, and assuming the tenant does not default on that contractual obligation, ABC would suffer no loss of rents and receive no payment for that exposure under business income coverage.
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Corporation XYZ (tenant), should insure against its own revenue loss, including continuing rental or other obligations.
When you have two separate legal entities, each should insure against loss as if the other didn't exist.
Seems straightforward—but then there's the second sentence: They are one and the same when it comes to ownership. Two separate legal entities are not “one and the same.” This would be different if the insured were a sole proprietor who owned and occupied the building under two different fictitious names. In our example, there may be two distinct businesses, but only one legal entity: the sole proprietor. In that situation, our email friend and his underwriters are right to be concerned that any loss of rents claim is simply moving money from one pocket to another. But that is not the case here. Two separate legal entities deserve separate coverage consideration, period.
Common Ownership: So What?
Although that is a key factor in workers' compensation experience mods and perhaps a parent corporation/subsidiary, it has no bearing in property or liability when the various parties are separate legal entities. Consider a more common scenario in which the tenant corporation insured occupies a building owned by the CEO in his personal name. Same person may be running both businesses, but legally they are separate entities.
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