Because a policy’s loss of rents coverage did not specifically require that a building be rented when a physical loss occurred, the insured was entitled to attempt to prove an insurance claim for loss of rents even though the building was not actually rented when the loss occurred. ( Ventura Kester, LLC v. Folksamerica Reinsurance Co. (2013) WL 4829123)
Facts
Ventura Kester, LLC owned a commercial building and purchased property insurance from Folksamerica Reinsurance Company. At the time Ventura purchased the policy, a long-term tenant was leasing the building.
The policy covered Ventura’s interest in certain buildings, and also covered rents lost as a result of covered physical damage to those buildings. The policy stated: “Subject to the terms, conditions and limitations of this policy, we insure you against financial loss resulting from: 1. direct physical loss of or damage to covered property caused by an accident; and … 3. rents including accrued rents which become uncollectible, and extra expense incurred to prevent loss of rents, because of damage to or destruction of covered structures caused by an accident.”
The policy also stated: “[T]he amount we will pay is calculated as follows: …5. Rents We will pay: a. your net loss of rental income; and b. rents accrued but rendered uncollectible by reason of a covered loss at a location described on the Declarations Page; and c. your extra expenses necessarily incurred to minimize your rental income loss, but only to the extent that the rental income loss we would otherwise pay is reduced.”
Ultimately, Ventura’s long-term tenant vacated the building. Over the next few months, Ventura engaged in negotiations with various prospective tenants who expressed interest in leasing the building, and Ventura even executed a non-binding “letter of intent” with one potential tenant.
Before Ventura actually entered into a lease with a new tenant, thieves entered the building, stole copper wire and pipes, and caused extensive damage to the property. Even after the damage occurred, Ventura continued to negotiate with potential tenants.
Ventura reported the vandalism damage to Folksamerica. When adjusters inspected the property over the next few months, they discovered additional vandalism, which they treated as a second claim. During the entire time the two insurance claims were pending, Ventura engaged in negotiations with different potential tenants, but Ventura did not succeed in actually renting the building.
Although Folksamerica tendered checks for the cost of repair, Ventura asserted that the amount tendered was inadequate to repair the damage and that Ventura could not commence repairs until the claim was fully paid. Further, a construction company estimated that it would take up to a year to repair the vandalism damage, including the time to complete a plan check, obtain permits and complete building code upgrades.
Eventually, Ventura and Folksamerica entered into a partial settlement, by which Ventura released all claims except the claim for lost rents. Folksamerica subsequently denied the loss of rents claim, because there was no signed lease in effect at the time of the loss.
After Folksamerica denied coverage for the claim for lost rents, Ventura filed suit for breach of contract and bad faith. Folksamerica then filed a motion for summary judgment, asserting that Ventura was not entitled to pursue a claim for lost rents without a signed lease at the time of the loss. The court granted Folksamerica’s motion for summary judgment, and Ventura appealed.
Holding
The Court of Appeal reversed. The appellate court concluded that the policy’s lost rents provision was ambiguous, and that the language of the policy did not require that the building actually be leased at the time of the loss. The court noted that, if Folksamerica had wanted to limit the recovery or calculate lost rents based on existing tenants at the time of the building damage, Folksamerica could have written the policy to provide as such. The court concluded that, because the policy was ambiguous, a policyholder would have a reasonable expectation of coverage for rents that were actually lost as a result of the property damage, even if the building did not have a tenant at the time of the loss.
The appellate court concluded a triable issue of fact existed as to whether Ventura would have secured a tenant but for the vandalism damage. Thus, a triable issue of fact existed as to whether Ventura actually lost rents. Under the circumstances, the appellate court held that the trial court should have denied Folksamerica’s motion for summary judgment.
Comment
Insurance against loss of rental income is a form of business income coverage. Some policies only provide coverage if the building is actually leased at the time of a loss. Other policies are broader, and provide coverage if the building either is actually leased or held for rental at the time of a loss. Because the policy at issue in this case did not clearly specify whether the building actually had to be leased at the time of a loss, the appellate court resolved the ambiguity in favor of the insured.