There’s no doubt the U.S. real estate market has been adversely affected by COVID-19. For retail landlords, the pandemic has led to a loss of rental income and business interruption. For those that house essential businesses or healthcare functions, the challenge is to keep employees, tenants and customers safe, preventing the spread of the virus from within their walls.

From commercial shopping districts and malls to supermarkets and residential properties repurposed as virtual offices, real estate owners and operators face more questions than answers. For many, the first question is: Does their scenario qualify as a business interruption (BI) claim?

Business Interruption Claims Considerations for Real Estate Operators

There are a number of important conditions to consider when presenting a BI claim. First, to claim business interruption coverage, a covered peril - typically some type of direct physical damage - is required to trigger the policy. In most cases, it has been difficult to make a case for direct physical damage of real estate when it comes to COVID-19. If it’s possible to claim property damage, the question is then: Was the damaged property intended to be insured? Additionally, there may be a virus exclusion in the BI policy.

Despite the above, there are many prominent law firms that believe there’s a case to be made and BI coverage can be achieved. Attorneys will look for the following to be documented in your real estate COVID-19 BI claim:

  1. Was the property barred from use, potentially engaging the policy’s Ingress/Egress Clause?
  2. Did a civil authority, i.e. a Federal, State, Provincial or local government agency, prevent access to the property?
  3. Was the loss of damage eminent, therefore the property needed to be secured from eminent loss or preserved, engaging the policy’s Sue and Labor Clause?

Many adjusters will argue that the above BI policy clauses are not triggers for coverage and will likely issue either a reservation rights while reviewing the claim further, or deny the claim outright.

  • File as soon as the loss occurs.
  • Expect reservation of rights or denial.
  • Duty to substantiate and prove claim is on the insured.
  • Keep track of the claim with three buckets of loss for BI: expediting expense, extra expense and BI loss of revenue and loss of rents.

Does Your Policy have a Vacancy Clause?

It is important to notify your broker if your facility is no longer occupied to determine what actions you need to take to protect your property from loss.

Real estate owners and operators should check their property policies for a “Vacancy Clause.” Should a property become vacant for a period of time, there is a trigger to change, restrict or cease coverage. Triple Net Properties will be the most affected by this.

Vacancy clauses are triggered 30 to 60 days after a vacancy and can: modify coverage from replacement cost to actual cash value (depreciation) and delete vandalism coverage from your policy and/or can outright cease coverage for property damage. In many policies, there is a difference between “vacancy” and “unoccupied.” Check your policy to determine what your policy says.

Tips for all Real Estate Owners/Operators on Minimizing Exposure

  • Implement increased cleaning schedules for high-touch surfaces and objects.
  • Provide employees with extra cleaning supplies.
  • Solidify back-up suppliers for critical business operations.
  • Consider temporarily closing common areas. In residential complexes, this will include fitness centers and community rooms. In essential businesses, this may include the break room, lunchroom, etc.
  • Leasing staff should adhere to the government mandates. If holding showings, ask visitors to maintain a 6-ft. distance from each other and delay showings if anyone is feeling sick.
  • Update “force majeure” clause, or unforeseen circumstances, in all contracts.
  • Encourage tenants to create individual business continuity and emergency pandemic plans.
  • Establish an easy way – email, post signs, text, a What’s App group, etc. – to communicate with all real estate tenants when municipal policies related to COVID-19 are updated, affecting the facility.

Contact HUB Risk Services to learn how to develop a business continuity plan that will help protect your business and employees from the unexpected. Get the latest information, guidance and resources for real estate on Coronavirus (COVID-19) to help you protect what matters most on our Coronavirus Resource Center.