Policyholders concerned that coverage for loss of rents and loss of profits will end with the one-year anniversary of the February 2011 earthquake may have reason for optimism, says Michael Childress, of Risk Worldwide.
With the first year anniversary of the February 22, 2011 earthquake, business and commercial property owners in Christchurch are collectively holding their breath in anticipation of their insurance cover for lost rents and lost profits being pulled out from under them.
There are mistaken beliefs regarding the limited time period during which you can recover under your insurance policy for lost rents and lost profits. That period is referred to in insurance policies as the “indemnity period”. Questions surrounding the calculation of the indemnity period are when does it start and when does it end.
To answer these questions, it is useful to consider the underlying purpose of insurance coverage. Its purpose is to ameliorate, mitigate, or reduce the financial consequences to your business as a result of an insured event such as an earthquake. The goal, ultimately, is to put you back in the position you would have been in had the loss not occurred. When your insurance cover is considered in light of its purpose and goal, there is reason for hope – even with the passage of the 12 month anniversary last week.
The following are some reasons why.
Multiple Occurrences – The simple fact is that the Christchurch community was affected by multiple occurrences. Since the first earthquake on September 4, 2010, the EQC has classified 15 different earthquakes as separate insurance events. At minimum, policyholders’ indemnity periods should start anew with each separate event. As a result, policyholders should not be losing their coverage for loss of rents and loss of profits in the coming weeks.
The 12 month period may not commence until you have been fully paid for physical damage to your property – A second reason for optimism is that many commercial insurance policies may contain the following provision, or something similar, as a condition of cover for loss of rents or loss of profits: “The Insured is only entitled to cover under this section of the policy where a claim has been paid or accepted under a Material Damage policy…”. Under this language, the 12 or 24 month “indemnity period” should not begin until your insurer has paid you in full to repair or replace the physical damage to your property.
Material damage coverage for acts undertaken at the order of a civil authority – Third, claims for loss of rents and loss of profits could be made under the “material damage” cover of your insurance policy. The material damage section of most insurance policies will cover “loss and damage” (or “loss or damage”), and may be complemented by a broadly worded extension of coverage for acts undertaken at the order of a civil authority.
It is a basic tenet of insurance contract interpretation that a contract should not be construed in a way that renders any of its words superfluous. Therefore, “loss” and “damage” must mean two different things. “Damage” typically refers to physical damage to buildings and property while “loss” connotes an “intangible” loss, such as the loss of rents or profits. Accordingly, where a policyholder’s material damage coverage applies to both loss and damage, the loss of rents and profits as a result of an earthquake event may be covered under the material damage section.
- Michael Childress is an insurance claim consultant who works for Risk Worldwide as an advocate for commercial policyholders. Risk Worldwide is an international consulting company, with a Christchurch office, that specialises in insurance recovery. MChildress@riskworldwide.com.