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One of our clients owns land that he leases under a ground lease to a tenant that constructed its own commercial building. Our client requested to insure its loss of rental income in the event the building is destroyed by a covered cause of loss. However, the underwriter rejected the request stating that the loss of rental income could not be insured since our client did not lease the building to the tenant but rather just the land.

My thought was that if the tenant's building was a total loss, the tenant would be unable to continue to pay the ground lease. Wouldn't this be insurable interest in order to cover the loss of ground lease income? Also, the business income form does not require the damaged property to be owned property.

Hawaii Subscriber

It really depends on what the lease says. If after the lease ends the owner of the ground lease obtains ownership of the building, loss of rents coverage is permitted. But, if the building ownership remains with the lessee, loss of rents is not permitted.

On a practical note, even if loss of rents for the land owner is permitted, probably not many underwriters would write the coverage because the land owner has no control over the building. It seems that an underwriter would consider this lack of risk control a serious impediment to writing loss of rents coverage for the land owner—even if it is permitted.

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