A commercial client, King LLC, bought a building and set up a separate LLC, Acme LLC, to own the building. King is leasing the building from Acme. Both entities have a common individual owner. The property coverage for King is on form CP 0010 12, and the business interruption and extra expense insurance, including loss of rent, is written on form CP 0030 10 12.

The underwriter tells me that in order to have coverage for loss of rents to Acme, I have to write a separate policy for Acme.

Q: Instead, can I add Acme as a named insured to the existing policy, which would include coverage for loss of rental income from King in the event of a loss to the building making the tenant unable to occupy it?

Response 1: If the insurer allows you to add the building owner as the second named insured that should work. But for any claims involving both entities, they share the same limits.

There is an alternate way of handling this. Require the rental contract between the owner and tenant pay rent regardless of the reason the building is damaged for a certain period, perhaps one year. It then becomes a continuing normal expense and would be covered under the tenant’s policy and the owner gets the rent.

Response 2: I can see no technical reason why you cannot do what you suggest. However, I suspect the underwriter is thinking that the cleanest approach to this situation is to have separate policies for the separate LLCs, even though the LLCs are owned by the same individual. 

A point to potentially consider: One reason LLCs are established is to limit liability. Should an issue ever come to court related to limiting the liability of each separate entity, the fact that both LLCs are insured under the same policy could help an opposing attorney show that the two LLCs are, for all practical purposes, a single entity. This could help that attorney “pierce the veil” between the assets and activities of the two entities. In lawsuit world, you never know.

Another point: I know you’re thinking about loss of business income at the moment, you and your client also need to consider that the two LLCs will be sharing commercial general liability limits should both entities become defendants in the same claim or lawsuit—definitely not an impossibility. 

Response 3: I agree with underwriting on the need for two policies. A bigger issue is liability and the dilution of limits from having both entities listed on one policy. I feel two policies will allow the carrier to offer coverage to each entity on its own merits for the perils insured. Having both entities listed will still be subject to the actual loss sustained provision for the named insured, not an additional insured as you propose.

Response 4: Trying to write two coverage situations on one policy is clever but not fair to the carrier. The tenant's policy, if it includes business income, will pay the continuing expense of rent. If that policy lapses and is unavailable at the time of loss, they would need their own coverage to cover its continuing expenses. Explain all this to the insured and let them decide.

Response 5: The answer depends on information beyond what you've provided. If these are indeed separate legal entities, best practices would generally dictate separate policies notwithstanding your loss of rents question. The question also depends upon the details in the leases—duration, abatement and more.

Without knowing those details, if you wrote the entire conglomerate on one policy, the "loss of rents" calculation would involve the aggregate of results for the overall entity, eliminating inter-organizational transactions. In that calculation there could be no "loss of rents" because the reduction in rental income by one entity would be exactly offset by the reduction of rental expense for the other entity. 

With an arms-length lease, separate legal entities and separate policies, the result would be different for each entity but might net to the same overall result for the common owner. Separating the entities has wider implications than just insurance. It might firewall the entities for liability purposes and the various entities might have different income tax situations.

Response 6: I am not aware of any reason that a building owner and tenant cannot be insured by the same policy. If there is a lease between the two, it should not be an issue to adjust loss of income claims, presuming you include a business income and extra expense, caused by physical loss to the building. The lease is important as it should set out whether rents abate during a period in which the premises is partially or completely untenantable. If rents do not abate, this would be a continuing expense under the business income insurance of the tenant. If the rents do abate, the landlord would then collect loss of rents.

Response 7: Rent is an ongoing expense. There are two different “persons” in this lease relationship, and it does not matter that there is a common member. This is no different than if the building owner was leasing the building to a wholly unrelated entity.

The requirement to continue paying rent should be in the lease agreement—and there must be a lease agreement.

This question was originally submitted by an agent through the Big “I” Virtual University’s (VU) Ask an Expert Service, with responses curated from multiple VU faculty members. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.