What is loss of rent cover?
11 May 2023
What is loss of rent insurance? Loss of rent insurance forms part of a Property Owners’ Policy.
If an insured event such as a flood or fire occurs, which renders the property uninhabitable and prevents the property owner from receiving rental payments, it can compensate them for the financial loss of income.
Loss of rent insurance cannot be bought as a stand-alone policy and forms part of a property owners’ policy. As the name suggests, loss of rent insurance is a form of cover that safeguards the property owner against a loss of rental income. A property owners policy, which includes loss of rent insurance, will cover you if your property is damaged by an insured event such as fire, flood or another natural disaster. The actual damage to the property will be included under the buildings section of the policy, but there needs to be insured damage to trigger a loss of rent claim.
If such an insured event occurs and your property is deemed to be uninhabitable, you won’t be able to let it out, and/or the tenants have to vacate, there may be a reduction or loss in rental income received.
For residential properties, cover is normally provided as a fixed percentage (20%-33%) of the buildings’ declared value or sum insured and will cover alternative accommodation costs instead – for owner occupied properties.
Whereas commercial cover is based on the actual annual rental agreed in the lease, so care should be taken to consider any planned rental escalation accordingly.
It is also worth saying, at this point, that not all property owners’ policies include this cover as standard or have the same level of loss of rent insurance.
Cover can be provided on a “Full Loss of Rent” or a “Basic Material Damage” basis.
Full loss of rent cover is the more comprehensive level and will compensate you for the loss of reduction in rent from the time of the damage until it is rented again, up to the time limit given under the policy – known as the Indemnity period.
It is important to have the correct indemnity period and this should be a minimum of 24 or 36 months, otherwise, in the event of a major loss, you may find that there is inadequate cover. Adequate time needs to include time for clearance of a site or debris removal, planning permission or Architects’ work – which can take a considerably long time and is also dependent on the location of the property for access – whether it is a Listed Building or in a Conservation Area or Area of Outstanding Natural Beauty etc.
Cover can also include any additional costs for re-letting your property and some other losses you may suffer, such as Managing Agents’ fees to project manage the repairs/reinstatement.
Basic cover on, the other hand, may only cover loss of rent for the period that the property is completely uninhabitable, not the time it then takes to re-let it – which can be entirely two different dates or time periods.
In effect, for property owners, loss of rent insurance is the equivalent of Business Interruption insurance for businesses, in that it covers the non-physical aspects of a loss.
If you buy your policy online or direct from an Insurer the level of cover provided may not be obvious and it may only become apparent if and when you need to make a claim.
This insurance should not be confused with “Rent Guarantee” cover, which relates more to a residential tenant defaulting on payment of rent and the eviction of the tenant.
That is why it is worth talking to a specialist property insurance broker to ensure you have the appropriate cover in place. If you have any queries, please do not hesitate to contact the team at Hazelton Mountford on 01905 611 951.