Summary: Leasehold interest insurance protects against financial loss suffered by a building tenant, when a favorable lease is cancelled before expiration because of loss or damage to the building by an insured cause of loss. To provide this coverage, the Insurance Services Office (ISO) simplified commercial property program uses Leasehold Interest Coverage Form CP 00 60 06 95, along with Leasehold Interest Coverage Schedule Form, CP 19 60 11 85, and one of forms CP 60 05 11 85 to CP 60 15 11 85, which are tables of leasehold interest factors. As with other ISO simplified commercial forms, these forms are combined with others. These include a declarations page, Common Policy Conditions Form, IL 00 17 11 98, Commercial Property Conditions Form, CP 00 90 07 88, and a causes of loss form, CP 10 10 06 07, CP 10 20 06 07, or CP 10 30 06 07. The coverage may be provided via a monoline policy or a package policy, by being combined with other forms. The declarations page provides basic coverage information; Schedule Form, CP 19 60 11 85, provides information regarding details of the lease for which the insurance is provided and derivation of the values used to establish the amounts of insurable leasehold interest. When reference is made to rules, these rules are located in the Insurance Services Office Commercial Lines Manual (CLM).

Topics covered: Coverage agreement

Exclusions

Limits of insurance

Loss conditions

Additional condition—cancellation

Definitions

Schedule form CP 19 60

Leasehold interest factors

Coverage Agreement

 We will pay for loss of Covered Leasehold Interest you sustain due to the cancellation of your lease. The cancellation must result from direct physical loss of or damage to property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss.

1.  Covered Leasehold Interest

Covered Leasehold Interest means the following for which an amount of "net leasehold interest" at inception is shown in the Leasehold Interest Coverage Schedule:

a.  Tenants' Lease Interest, meaning the difference between the:

(1) Rent you pay at the described premises; and

(2) Rental value of the described premises that you lease.

b.  Bonus Payments, meaning the unamortized portion of a cash bonus that will not be refunded to you. A cash bonus is money you paid to acquire your lease. It does not include:

(1) Rent, whether or not prepaid; or

(2) Security.

c.  Improvements and Betterments, meaning the unamortized portion of payments made by you for improvements and betterments. It does not include the value of improvements and betterments recoverable under any other insurance, but only to the extent of such other insurance.

      Improvements and betterments are fixtures, alterations, installations or additions:

(1) Made a part of the building or structure you occupy but do not own; and

(2) You acquired or made at your expense but cannot legally remove.

d.  Prepaid Rent, meaning the unamortized portion of any amount of advance rent you paid that will not be refunded to you. This does not include the customary rent due at:

(1) The beginning of each month; or

(2) Any other rental period.

 Analysis

 Section A of form CP 00 60 covers the insured in case of loss of "covered leasehold interest." Such a loss must be due to the cancellation of the lease at the premises described in the declarations. Lease cancellation must result from direct physical loss or damage by a covered cause of loss.

 "Covered leasehold interest" includes any one or more of the four following kinds of leasehold interest: tenants lease interest, bonus payments, improvements and betterments, and prepaid rent. In order for an interest to be covered, an amount of "net leasehold interest" (see Schedule Form, CP 19 60 11 85) must be shown on schedule form CP 19 60.

 Form CP 00 60 defines "tenants lease interest" as the difference between the rent the insured pays and the rental value of the described premises. CLM rule 65 clarifies that this is applicable whether the tenant occupies the premises or has sublet all or a portion (usually for a higher rental value). The definition of "gross leasehold interest," discussed later under Definitions, also makes this clear.

 The policy also covers "bonus payments." This is the unamortized portion of a nonrefundable cash bonus paid to acquire a lease. It does not include rent, prepaid or otherwise, or security.

 Many times a tenant adds permanent fixtures, alterations, installations, or additions at his own expense. Often, these cannot be removed. Thus, the tenant now has an insurable interest in real property. This leasehold interest is the third category on form CP 00 60.

 It is possible that a leasehold interest in improvements and betterments was created before the current lease term. The covered interest does not include the value of coverage provided by other insurance but only to the extent of such other coverage.

 The final category of coverage is prepaid rent. The policy also covers the unamortized portion of any amount of advance rent paid by the insured that is not refundable. It does not include customary rent due at the beginning of each month or other rental period.

 The covered causes of loss that trigger a leasehold interest claim are those provided under the applicable causes of loss form, as shown in the declarations. See Causes of Loss Forms.

 Exclusions

 See applicable Causes of Loss Form as shown in the Declarations.

 Analysis

 The Exclusions section refers to the exclusions found in the applicable causes of loss form, as shown in the declarations. See Causes of Loss Forms for the standard exclusions of the three causes of loss forms.

 Each of the causes of loss forms contains an identical special exclusions section pertaining specifically to the leasehold interest coverage form, containing two provisions: (1) it exempts the leasehold interest coverage from the building ordinance or law exclusion of the causes of loss form; and (2) it excludes any loss caused by the insured's cancelling the lease; suspension, lapse, or cancellation of any license; or any other consequential loss. Thus, leasehold interest applies if a lease is cancelled due to the necessity of complying with ordinances or laws controlling construction, repair, property use, or requiring demolition—as long as physical damage to the building is caused by a covered cause of loss.

 Limits of Insurance

 1.  Applicable to Tenants' Lease Interest

a.  The most we will pay for loss because of the cancellation of any one lease is your "net leasehold interest" at the time of loss.

     But, if your lease is cancelled and your landlord lets you continue to use your premises under a new lease or other arrangement, the most we will pay for loss because of the cancellation of any one lease is the lesser of:

(1) The difference between the rent you now pay and the rent you will pay under the new lease or other arrangement; or

(2) Your "net leasehold interest" at the time of loss.

b.  Your "net leasehold interest" decreases automatically each month. The amount of "net leasehold interest" at any time is your "gross leasehold interest" times the leasehold interest factor for the remaining months of your lease. A proportionate share applies for any period of time less than a month.

      Refer to the end of this form for a table of leasehold interest factors.

2.  Applicable to Bonus Payments, Improvements and Betterments and Prepaid Rent

a.  The most we will pay for loss because of the cancellation of any one lease is your "net leasehold interest" at the time of loss.

      But, if your lease is cancelled and your landlord lets you continue to use your premises under a new lease or other arrangement, the most we will pay for loss because of the cancellation of any one lease is the lesser of:

(1) The loss sustained by you; or

(2) Your "net leasehold interest": at the time of loss.

b.  Your "net leasehold interest" decreases automatically each month. The amount of each decrease is your "monthly leasehold interest." A proportionate share applies for any period of time less than a month.

 Analysis

 The policy describes separate limits of insurance in section C for tenants lease interest and bonus payments, improvements and betterments, and prepaid rent coverages. Terms set in quotes are terms defined in the policy and are discussed in the Definitions section.

 For tenants lease interest, the most the insurer will pay due to the cancellation of a lease is the "net leasehold interest," an amount that decreases automatically each month. The amount of net leasehold interest at any time is the gross leasehold interest, which is multiplied by the leasehold interest factor for the remaining months of the lease. For any period of less than a month, a proportionate factor is used. A table of leasehold interest factors used to determine net leasehold interest is always attached to and becomes a part of the leasehold interest coverage policy.

 For bonus payments, improvements and betterments, and prepaid rent, the most the insurer will pay due to the cancellation of a lease is the net leasehold interest, decreased automatically each month by the amount of the monthly leasehold interest. A proportionate share of the monthly leasehold interest applies to periods of less than a month. After cancellation, if the landlord allows the tenant to stay on under a new lease or other arrangement, the insurance will pay no more than the difference in rent between the cancelled lease and rent under the new arrangement

.Loss Conditions

 The following conditions apply in addition to the Common Policy Conditions and the Commercial Property Conditions.

1.  Appraisal

     If we and you disagree on the amount of loss, either may make written demand for an appraisal. In this event, each party will select a competent and impartial appraiser. The two appraisers will select an umpire. If they cannot agree, either may request that selection be made by a judge of a court having jurisdiction. The appraisers will state the amount of loss. If they fail to agree, they will submit their differences to the umpire. A decision agreed to by any two will be binding. Each party will:

a.  Pay its chosen appraiser; and

b.  Bear the other expenses of the appraisal and umpire equally.

      If there is an appraisal, we will still retain our right to deny the claim.

2.  Duties In The Event Of Loss Of Covered Leasehold Interest

a.  You must see that the following are done in the event of loss of Covered Leasehold Interest:

(1) Notify the police if a law may have been broken.

(2) Give us prompt notice of the direct physical loss or damage. Include a description of the property involved.

(3) As soon as possible, give us a description of how, when and where the direct physical loss or damage occurred.

(4) Take all reasonable steps to protect the property at the described premises from further damage by a Covered Cause of Loss. However, we will not pay for any subsequent loss or damage resulting from a cause of loss that is not a Covered Cause of Loss. Also, if feasible, set the damaged property aside and in the best possible order for examination.

(5) As often as may be reasonably required, permit us to inspect the property proving the loss or damage and examine your books and records.

      Also permit us to take samples of damaged and undamaged property for inspection, testing and analysis, and permit us to make copies from your books and records.

(6) Send us a signed, sworn proof of loss containing the information we request to investigate the claim. You must do this within sixty days after our request. We will supply you with the necessary forms.

(7) Cooperate with us in the investigation or settlement of the claim.

b.  We may examine any insured under oath, while not in the presence of any other insured and at such times as may be reasonably required, about any matter relating to this insurance or the claim, including an insured's books and records. In the event of an examination, an insured's answers must be signed.

3.  Loss Payment

      We will pay for covered loss within thirty days after we receive the sworn proof of loss, if:

a.  You have complied with all of the terms of this Coverage Part; and

b.  (1) We have reached agreement with you on the amount of loss; or

      (2) An appraisal award has been made.

4.  Vacancy

a.  Description of Terms

(1) As used in this Vacancy Condition, with respect to the tenant's interest in Covered Property, building means the unit or suite rented or leased to the tenant. Such building is vacant when it does not contain enough business personal property to conduct customary operations.

(2) Buildings under construction or renovation are not considered vacant.

b.  Vacancy Provisions – Subleased Premises

      The following provisions apply if the building where direct physical loss or damage occurs has been vacant for more than sixty consecutive days before that loss or damage occurs, provided you have entered into an agreement to sublease the described premises as of the time of loss or damage:

(1) We will not pay for any loss or damage caused by any of the  following even if they are Covered Causes of Loss:

(a) Vandalism;

(b) Sprinkler leakage, unless you have protected the system against freezing;

(c) Building glass breakage;

(d) Water damage;

(e) Theft; or

(f) Attempted theft.

(2) With respect to a Covered Cause of Loss not listed in (1)(a) through (1)(f) above, we will reduce the amount we would otherwise pay for the loss or damage by 15 percent.

c.  If you have not entered into an agreement to sublease the described premises as of the time of loss or damage, we will not pay for any loss of Covered Leasehold Interest.

 Analysis

 The loss conditions provisions, located in section D of the policy, are similar to the loss conditions of form CP 00 10 06 07. CP 00 60 does not cover tangible property; the provisions have been modified to apply to the insured's leasehold interest. For example, the property abandonment provision, the property inventory requirement, and the recovered property and valuation clauses are omitted.

 Because the amount of loss may be determined through calculations provided for in the policy, the loss payment clause is much simpler than in form CP 00 10. The insurer promises to pay for covered loss within thirty days after receipt of the sworn proof. The insured must comply with all terms of the leasehold interest coverage part, and an agreement be reached on the amount of loss or an appraisal award be made.

 The vacancy clause treats insureds who have sublet the premises differently from insureds who have not. If the building has been vacant for more than sixty consecutive days before the loss, and the insured has sublet the premises, no coverage applies to leasehold interest loss caused by vandalism, sprinkler leakage (unless the insured has protected the system against freezing), building glass breakage, water damage, theft, or attempted theft. Loss payment for any other covered loss is reduced by 15 percent. If there is no such sublease agreement at the time of loss, the policy will not pay any leasehold interest loss. A building is considered vacant when it does not contain enough business personal property to conduct customary operations, but a building under construction is not considered vacant.

 Additional Condition—Cancellation

      The following condition replaces the Cancellation Common Policy Condition:

     Cancellation

1.  The first Named Insured shown in the Declarations may cancel this policy by mailing or delivering to us advance notice of cancellation.

2.  We may cancel this policy by mailing or delivering to the first Named Insured written notice of cancellation at least:

a.  ten days before the effective date of cancellation if we cancel for nonpayment of premium; or

b.  thirty days before the effective date of cancellation if we cancel for any other reason.

3.  We will mail or deliver our notice to the first Named Insured's last mailing address known to us.

4.  Notice of cancellation will state the effective date of cancellation. The policy will end on that date.

5.  If this policy is cancelled, we will send the first Named Insured any premium refund due. The cancellation will be effective even if we have not made or offered a refund.

6.  If this coverage is cancelled, we will calculate the earned premium by:

a.  Computing the average of the "net leasehold interest" at the:

     (1) Inception date, and

     (2) Cancellation date, of this coverage.

b.  Multiplying the rate for the period of coverage by the average "net leasehold interest."

c.  If we cancel, we will send you a premium refund based on the difference between the:

     (1) Premium you originally paid us; and

     (2) Proportion of the premium calculated by multiplying the amount in paragraph a. times the rate for the period of coverage for the expired term of the policy.

d.  If you cancel, your refund may be less than the refund calculated in paragraph c.

7.  If notice is mailed, proof of mailing will be sufficient proof of notice.

 Analysis

 Section E of form CP 00 60 contains the additional condition relating to cancellation. This cancellation provision supersedes the cancellation clause of the common policy conditions form.

 The difference between the two cancellation provisions is in the method provided for computing return premium. Because the amount of leasehold interest decreases steadily from inception to expiration, the daily earned premium is greatest early in the policy term. Cancellation must be computed based on the higher average net leasehold interest between inception and date of cancellation, rather than the lower average leasehold interest for the full original term of the policy, the basis of the original premium. Only the difference between original premium and the earned premium for this higher average amount of insurance is returnable. As in the common policy conditions, the refund may be more favorable if the insurer, rather than the insured, cancels. CLM rule 65 sets out the steps for premium determination and computation of earned premium at cancellation.

 Definitions

 1.  "Gross Leasehold Interest" means the difference between the:

a.  Monthly rental value of the premises you lease; and

b.  Actual monthly rent you pay including taxes, insurance, janitorial or other service that you pay for as part of the rent.

      This amount is not changed:

(1) Whether you occupy all or part of the premises; or

(2) If you sublet the premises.

     Example:

     Rental value of your leased

     premises                                           $5,000

     Monthly rent including taxes,

     insurance, janitorial or other

     service that you pay for as

     part of the rent                                   -4,000

                                                             ———-

     "Gross Leasehold Interest"                $1,000

2.  "Monthly Leasehold Interest" means the monthly portion of covered Bonus Payments, Improvements and Betterments and Prepaid Rent. To find your "monthly leasehold interest," divide your original costs of Bonus Payments, Improvements and Betterments or Prepaid Rent by the number of months left in your lease at the time of the expenditure.

      Example:

      Original cost of Bonus Payment                     $12,000

      With twenty-four months left in the lease at

      time of Bonus Payment divided by                  24

                                                                    —————-

      "Monthly Leasehold Interest"                         $500

3.     "Net Leasehold Interest:"

a.  Applicable to Tenants Lease Interest.

     "Net Leasehold Interest" means the present value of your "gross leasehold interest" for each remaining month of the term of the lease at the rate of interest shown in the Leasehold Interest Coverage Schedule.

     The "net leasehold interest" is the amount that, placed at the rate of interest shown in the Leasehold Interest Coverage Schedule, would be equivalent to your receiving the "Gross Leasehold Interest" for each separate month of the unexpired term of the lease.

     To find your "net leasehold interest" at any time, multiply your "gross leasehold interest" by the leasehold interest factor found in the table of leasehold interest factors attached to this form.

      Example:

      (twenty months left in lease, 10 percent effective annual rate of interest)

      "Gross Leasehold Interest"           $ 1,000

      Leasehold Interest Factor             x 18.419

                                                         ————

     "Net Leasehold Interest"                $18,419

b.  Applicable to Bonus Payments, Improvements and Betterments or Prepaid Rent.

     "Net Leasehold Interest" means the unamortized amount shown in the Schedule. Your "net leasehold interest" at any time is your "monthly leasehold interest" times the number of months left in your lease.

      Example:

      "Monthly Leasehold Interest"     $ 500

      With ten months left in lease       x 10

                                                     ———

      "Net Leasehold Interest"          $5,000

 Analysis

 The terms defined in section F of the policy establish the limits of insurance, premium, and the amount of premium refund (if any).

 Gross leasehold interest. This is the difference between the monthly rental value of the leased premises and the actual monthly rent paid. It includes any taxes, insurance, janitorial, or other services paid by the tenant as a part of the rent. This measure applies whether the lessee occupies the premises or has sublet all or any part of it. In the case of a sublease, the leasehold interest may exceed the difference between the lessee's and subtenant's rent if both are below the current rental level. For example, if the monthly rental value is $6,000, the lessee pays $5,000, and the subtenant pays $5,500, the $1,000 difference between the rental value and rent paid by the lessee is $500 more than the difference between the amount paid by the subtenant to the lessee.

 Monthly leasehold interest. This is the monthly portion of any covered bonus payments, improvements and betterments, and prepaid rent. This amount is determined by dividing the original cost by the number of months left in the lease at the time of the expenditure.

 Net leasehold interest. There are two definitions of "net leasehold interest." One applies to tenant's lease interest; the other to bonus payments, improvements and betterments, and prepaid rent. For tenant's lease interest, the net leasehold interest is the total present value of the gross (monthly) leasehold interest for the remaining term of the lease. This is computed by multiplying the gross leasehold interest by the leasehold interest factor found in the table of leasehold interest factors attached to the policy.

 For bonus payments, improvements and betterments, or prepaid rent, the factors in the table are not used; instead, the monthly leasehold interest is simply multiplied by the number of months remaining in the lease.