(December 2022)
This endorsement is used
with the Insurance Services Office (ISO) OP 00 01–Capital Assets Program
Coverage Form (Output Policy). It insures an
insured tenant's interest in a favorable lease. A lease is considered favorable
when the rent being paid is less than the rent that would be charged for a
similar building in a similar location. The coverage form pays the difference
between the rent paid prior to the loss and the rent that will be required
after the loss if the lease is cancelled
because of property damage caused by or that results from a covered cause of
loss. It also covers bonus payments and prepaid rent.
Note: This endorsement has an edition date of 10 10.
The endorsement schedule has spaces for the following information:
Lease
Information
Leasehold
Interest Information
Leasehold Interest Coverage applies to the following items but only if a Net Leasehold Interest amount at inception is entered:
Each item has spaces to enter the Gross Leasehold Interest, Monthly Leasehold Interest, Net Leasehold Interest at Inception, and Premium.
Total
Covered Leasehold Interest
Spaces are provided to enter Net Leasehold Interest at Inception and Premium.
The insurance company pays for the named insured's loss of covered leasehold interest because its lease was cancelled. This coverage applies only if the cancellation of the lease was a direct result of damage to the covered property that was caused by a covered cause of loss.
1.
Covered Leasehold Expense
This term includes three separate items that are covered if Net Leasehold Interest at Inception amount is entered on the endorsement schedule:
a.
Tenants' Lease Interest
This is the difference between the regular rental rate at the covered location and the discounted amount the named insured pays.
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Example: Vince's Vuvuzuelas was the first tenant in a recently renovated former factory building and received a 50% discount on the first three years of his monthly lease payments. A year after he moved in, a fire in another section of the building being renovated spread to his premises. It destroyed the stock of his beloved instruments. The damage from the fire was so extensive that the entire building was condemned, and Vince had to resume operations at another location but without the favorable discount on his rent. This coverage responded to the loss of his interest in the favorable lease for the two years that remained on his lease. Because he paid $9,000 per month and must pay $18,000 per month for a comparable new location, his Tenant’s Lease Interest loss is $9,000 X 24 = $216,000. |
b. Bonus Payments
This is the unliquidated part of a cash bonus the named insured paid to obtain its lease that will not be refunded. It does not include security deposits, prepaid rent, or regular rent.
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Example: Vince made a bonus payment of $15,000 to obtain the three-year deal. His bonus payments loss is $15,000/36 months x 24 months = $10,000. |
c. Prepaid Rent
This is the unliquidated part of any amount of advance rent the named insured paid that will not be refunded. It does not include regular rent due at the first of the month or any other rental period.
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Example: Vince agreed to pay the first year's rent in advance. However, because he has liquidated the full year of the prepaid rent, he does not recoup any part of it. |
2. Covered Causes of
Loss, Exclusions, and Limitations
This coverage is subject to the covered causes of loss, exclusions, and limitations in OP 00 01.
1.
Applicable to Tenants' Lease Interest
a. The most the insurance company pays is the named insured's net leasehold interest at the time of loss that resulted in the lease being cancelled.
There is an exception. If the lease is cancelled due to a loss, but the landlord offers an option for the named insured to remain at the current location, but at a new rental amount, the payment is the lesser of the following:
b. The named insured's net leasehold interest automatically decreases every month because another month’s rent has been paid. It is developed by multiplying the named insured's gross leasehold interest by the leasehold interest factor for the number of months remaining on its lease. Periods of less than a month are developed proportionately.
Note: The form advises the reader to look for the leasehold interest factor in a table at the end of the form. Unfortunately, no such table exists.
2.
Applicable to Bonus Payments and Prepaid Rent
a. The most the insurance company pays is the named insured's net leasehold interest at the time of loss that resulted in the lease being cancelled.
There is an exception. If the lease is cancelled due to a loss, but the landlord offers an option for the named insured to remain at the current location, but at a new rental amount the payment is the lesser of the following:
b. The named insured's net leasehold interest automatically decreases every month because the term of the lease is reduced. It is developed by dividing the bonus payment and prepaid rent by the length of the lease to determine the monthly leasehold interest. That amount is then multiplied by the number of months remaining in the now cancelled lease.
There are four loss conditions that apply to this coverage in addition to the Loss Conditions, Additional Conditions, and Capital Assets Coverage Form Conditions in OP 00 01 and the Common Policy Conditions.
Note: There is a possibility of ambiguity because of the way ISO uses these Loss Conditions. None of the following supersedes OP 00 01's Loss Conditions. That means that both versions of the loss condition apply, which can lead to confusion. It might be better if these loss conditions replaced the others.
Related Articles:
IL 00 17–Common Policy Conditions Analysis
OP 00 01–Capital Assets Program Coverage Form (Output Policy) Analysis
1. Appraisal
The insurance company and the named insured may not always agree on the amount of loss. When this happens, one of them submits a written request for an appraisal and each then selects a competent and impartial appraiser. The appraisers then choose an umpire. If they cannot agree on one, they can request that a judge of a court in the jurisdiction select one. Each appraiser states the amount of loss. If they cannot agree on the amount, they submit their differences to the umpire. Any decision made or agreement reached by any two of the three parties is binding on all parties.
The insurance company does not include the expenses of this process as part of the expenses it pays to settle the loss. The named insured pays the costs of its appraiser. The insurance company pays the costs of its appraiser. They both share the costs of the umpire and any other appraisal expenses equally.
The insurance company retains its right to deny the claim, even if there is an appraisal.
Note: This loss condition has only minor differences compared with the Appraisal Loss Condition in the coverage form.
2. Duties in the Event of Loss of Covered
Leasehold Interest
a. The insurance company requires that the named insured act reasonably after a loss, or it may refuse to pay it. The named insured is responsible for and must do the following:
Note: Coverage is not provided for expenses in taking any of these actions while those expenses are covered in the OP 00 01.
b. The insurance company may examine any insured under oath individually and not in the presence of any other insured. It may do this at any reasonable time, as often as necessary, and the examination can include anything that relates to the insurance or to the claim. It can ask questions about the named insured's books and records. The named insured must acknowledge in writing that the answers it gives in any examination are true and factual to the best of its knowledge.
Note: This loss condition has only minor differences compared to the Duties in the Event of Loss or Damage Condition in the coverage form.
3. Loss Payment
The insurance company agrees to pay a covered loss within 30 days after it receives a properly prepared sworn proof of loss. To receive the payment, the named insured must have complied with all of OP 00 01’s terms. The amount of loss must have been determined either through an agreement between the parties or through an appraisal award process.
Note: This is an abbreviated version of the Loss
Payment Condition in OP 00 01. It removes all items not related to Leasehold
Interest.
4. Vacancy and Unoccupancy
a.
Description of Terms
Building means the space the tenant rents or leases from the building owner with respect to its interest in the covered property. A building is considered vacant or unoccupied when there is not enough business personal property there to carry on its usual and customary operations. However, a building is not vacant or unoccupied if it is being renovated or is under construction.
b.
Vacancy and Unoccupancy Provisions–Subleased Covered Location
The named insured may have vacated the location but has a written sublease agreement with another party, and the building has been vacant for more than 60 consecutive days. In that case, there is no leasehold coverage if vandalism, breakage of building glass, theft, attempted theft, water damage, or sprinkler leakage occurs unless the system was protected against freezing. Coverage applies if another covered cause of loss occurs, but any loss payment is reduced by 15%.
c. There is no leasehold coverage if the named insured vacated the location, and there was no written sublease agreement.
Note: This is an abbreviated version of the Vacancy and Unoccupancy Condition in OP 00 01 with all items not related to Leasehold Interest removed and the subleased covered location added.
This cancellation condition replaces the one in IL 00 17– Common Policy Conditions. The primary difference is in explaining how the earned premium is calculated. It is described in item 6. below.
1. The named insured can cancel by mailing or delivering notice of its intent to do so before the cancellation date.
2. The insurance company can cancel by mailing or delivering written notice of cancellation to the named insured at least ten days before the effective date of cancellation if the premium was not paid or 30 days before the effective date of cancellation for any other reason.
Note: Laws in various states usually require more than a 30-day notice. However, the ten-day notice for non-payment of premium is not similarly affected.
3. The insurance company mails or delivers its notice to the last known mailing address of the named insured.
4. The notice must state the date that cancellation takes effect. Coverage ends on that date.
5. Cancellation requires the insurance company to send any premium refund due to the first named insured. However, cancellation is effective even if it has not actually made or offered a refund.
6. The earned premium is calculated as follows:
Step 1: Add the net leasehold interest at the inception date to the net leasehold interest as of the cancellation date and divide by 2 to develop an average net leasehold interest.
Step 2: Multiply Step 1 by the “rate for the period of coverage.”
Step 3: Subtract Step 2 from the initial premium paid.
Step 4: Refund Step 3 to the named insured.
Note: This item is the major change in this condition. Step 2 above refers to a “rate for the
period of coverage.” Unfortunately, the ISO Capital Assets Program does not
have such a rate, which may make this condition difficult to enforce.
The premium determined above may be less if the named insured cancels.
7. Proof of mailing is sufficient proof of notice if the insurance company mails the notice of cancellation.
Three terms are defined. Each is accompanied by an example.
1. Gross Leasehold Interest
This is the difference between the current monthly rental value at the covered location that the named insured is leasing and the amount it actually pays. It includes taxes, insurance, janitorial, and other services it pays as part of the rent. It does not change, regardless of whether the named insured occupies all or part of the covered location or sublets it.
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Example: Mary has been occupying 1111
Main for 20 years. She pays $600 per month. However, all other tenants in the
building pay $1,000 for the identical space. Mary’s current monthly rental
value is $1,000 and what she actually
pays is $600, so her gross leasehold interest is $400 per month. |
2. Monthly Leasehold Interest
This is the monthly portion of covered Bonus Payments and Prepaid Rent. It is determined by dividing the Bonus Payments made or the Prepaid Rent by the number of months that remain in the lease at the time the bonus payment is made or the rent is prepaid.
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Example: Mary paid $10,000 when she
moved in 20 years ago and 10 years prepaid rent of $72,000. Her lease term
was for 30 years. Her monthly leasehold interest is $82,000 divided by 360 =
$227.77. |
3. Net Leasehold Interest
a. Applicable to Tenants' Lease Interest
Net Leasehold Interest is the present value of the named insured's gross leasehold interest for each month that remains in the cancelled lease at the interest rate that is entered on the endorsement schedule. It is the amount equal to the named insured receiving the Gross Leasehold Interest for each separate month during the unexpired term of the lease if it was placed at the interest rate on the endorsement schedule.
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Example: Mary’s current leasehold
interest is $400 X 12 X 10 = $48,000 because there are 10 years left in her
lease. If the loss occurs today, the actual loss paid is $48,000 reduced by
multiplying it by the interest rate factor in the supplied table based on the
interest rate in the schedule and 120 months. |
Note: The definition above refers to a table of leasehold interest
factors that is attached to the form but there is no such form available. Refer
to CP 60 05 and CP 60 15 for examples of the leasehold interest factors used
with
CP 00 60–Leasehold Interest Coverage Form.
Related article: ISO Time Element Coverage Forms Available Endorsements and Their Uses
b. Applicable To Bonus Payments or Prepaid
Rent
Net Leasehold Interest is the unliquidated amount on the endorsement schedule. It is the named insured's number of months that remain on its lease multiplied by its monthly leasehold interest.
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Example: Mary’s bonus payment and prepaid rent
leasehold interest is $227.77 X 120 =
$27,332.40 if the loss would occur today because there are 120 remaining
months in the lease. |