AG 04 12–LEASEHOLD INTEREST COVERAGE

(December 2022)

INTRODUCTION

This endorsement is used to insure 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.

AG 04 12–LEASEHOLD INTEREST COVERAGE ANALYSIS

Schedule

The endorsement schedule has spaces for the following information:

Lease Information

• Lease Inception Date
• Lease Expiration Date
• Lease Period Remaining at Inception (expressed in months)
• Interest Percentage

Covered Leasehold Interest

• Leasehold Interest Coverage applies to the following items:
• Tenants' Lease Interest
• Bonus Payments
• Prepaid Rent

The schedule consists of four columns. Coverage for the particular item applies only if a limit is entered in the Net Leasehold Interest at Inception column.

A. Coverage

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 consists of three separate items. The item is covered only when an amount for Net Leasehold Interest at Inception 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 that the named insured pays.

Example: Mecklenburg entered into a 10-year lease arrangement with Barbara that includes four 10-year renewal options. A loss occurs five years into the second renewal option. The property's rental value has grown significantly since the initial arrangement, so Barbara exercises her option to void the contract due to the property loss. Mecklenburg pays $3,500 per month, but comparable rent today is $10,000. The loss is computed as $6,500 X 12 X 25 = $1,950,000.

b. Bonus Payments

This is the unliquidated part of a cash bonus that the named insured paid to obtain its lease that will not be refunded. It does not include security deposits, prepaid rent, or regular rent.

Example: The very favorable terms of Mecklenburg’s contract were due to Barbara’s need for upfront cash. Barbara received $100,000 at the time of signing. Mecklenburg’s bonus payment amount is $100,000 ÷ 50 = $2,000. There are 25 years left on the lease, so the bonus payment amount of loss is $50,000.

c. Prepaid Rent

This is the unliquidated part of any amount of advance rent that 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.

Example: Mecklenburg also agreed to pay the first five years rent in advance. Because he has liquidated the entire prepaid rent, no payment is due.

2. Covered Causes of Loss, Exclusions, and Limitations

This coverage is subject to the covered causes of loss, exclusions, and limitations in the coverage form.

B. Limits of Insurance

1. Applicable to Tenants' Lease Interest

a. The most the insurance company pays is the lesser of:

• The named insured's net leasehold interest at the time of loss that resulted in the lease being cancelled.
• The difference between the old rental amount and the new rental amount if the landlord offers the named insured the option to remain on subject to a new rental amount.

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 lesser of:

• The named insured's net leasehold interest at the time of loss that resulted in the lease being cancelled.
• The actual loss sustained by the named insured if the landlord offers the named insured the option to remain on subject to a new rental amount.

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.

C. Loss Conditions

There are four loss conditions that apply to this coverage in addition to the various condition sections in the policy.

Note: There may be some ambiguity because of the way ISO uses these Loss Conditions. Because none of the following supersedes the coverage form’s Loss Conditions, it means that both versions of the loss condition apply. This can lead to confusion. It would be less confusing if these loss conditions replaced their counterparts in the coverage form.

Related Article: AG 00 01–ISO Agricultural Capital Assets (Output Policy) Coverage Form Analysis

1. Appraisal

The insurance company and the named insured may not always agree on the actual 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 of the jurisdiction do so. 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 that any two of the three parties reaches is binding on all parties.

The expenses associated with this process are not included as part of the expenses the insurance company 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: There are only minor differences compared to the Appraisal Loss Conditions 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:

• Notify the police if it has reason to believe that a law may have been broken.
• Give the insurance company prompt notice of the loss or damage. The notice must provide a description of the damaged property.
• Give the insurance company a description of how, when, and where the loss occurred. This must be supplied as soon as possible, which is not quite as fast as “prompt.”
• Use reasonable measures to protect covered property at the covered location from further damage. If further damage does occur, there is no coverage for such damage if that further damage is the result of a cause of loss that is not covered by this form. When possible, the named insured is to separate damaged property from undamaged and arrange it for the insurance company to examine.

Note: Coverage is not provided for expenses in taking any of these actions while those expenses are covered in the AG 00 01.

• Allow the insurance company to inspect the property, examine and make copies of books and records, and take samples of damaged and undamaged property for inspection, testing, and analysis.
• Send the insurance company a signed and sworn proof of loss within 60 days of the request with the information it asks for to help it investigate the claim. The company must provide the necessary forms and specify the information it needs.
• Cooperate with the insurance company as it investigates and settles the claim.

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 related to the insurance or 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. In order to receive the payment, the named insured must have complied with all of AG 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 Loss Condition in the coverage form. It removes all terms 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 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 Loss Condition in the coverage form. It removes all terms not related to Leasehold Interest.

D. Cancellation Condition

This cancellation condition replaces the one in IL 00 17-Common Policy Conditions. The primary difference is that it explains how the insurance company calculates the earned premium. 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 10 days before the cancellation effective date if the premium was not paid

· Thirty days before the cancellation effective date for any other reason

Note: Laws in various states usually require more than a 30-day notice. However, the 10-day notice for non-payment of premium is not similarly affected.

3. The insurance company mails or delivers its notice to the named insured’s last known mailing address.

4. The notice must state the date that cancellation takes effect. Coverage ends on that date.

5. Cancellation requires that the insurance company send any premium refund due to the first named insured. However, cancellation is effective even if it has not actually made a refund or offered it.

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 coverage period.

Step 3. Subtract Step 2 from the initial premium paid.

Step 4. Refund Step 3 to the named insured.

The premium determined above may be less if the named insured cancels.

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 Agricultural 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 cancellation notice is mailed.

E. Definitions

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. This amount 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.

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 when the bonus payment is made, or the rent is prepaid.

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 at the interest rate on the endorsement schedule. It is the amount equal to the named insured receiving the Gross Leasehold Interest for each separate month for the unexpired term of the lease if it was placed at the interest rate on the endorsement schedule.

Note: The definition above refers to a table of leasehold interest factors that are 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.