Rent Insurance Rent insurance is a generic term applied to the business losses of both a landlord and tenant. Evolving terminology now usually designates the tenant's rent insurance Business Interruption Insurance, and indeed the need to pay rent when one cannot use the premises one is renting is very much a business loss. Many hotly contested lease negotiations could be significantly shortened if the lawyers for both sides understood how rent insurance works. The landlord's cost of insurance is almost always passed on to tenants, either through a net rent provision in which the tenant pays its share of all operating expenses, including insurance, or through a gross rent provision in which the tenant pays a base rent that includes base costs of all operating expenses, plus a share of increases in those expenses over a base year. The landlord and tenant have a shared interest in seeing that there is as little overlapping coverage as possible, and in having the insurance purchased by the entity who can get the lowest cost.
Every lease provides for some rent abatement in the event of damage to the building or premises.
The landlord may lose its claim for rent income insurance in these situations in two ways that are directly controlled by the lease provisions. Therefore, for small tenants who cannot pay rent if they do not have proper insurance, the landlord should either carefully monitor the tenant's insurance coverage, or delete any rent abatement provisions from the lease. Small tenants, particularly, have difficulty negotiating any rent abatements short of destruction of the premises or building. Even if a tenant obtains rent abatements for loss of use, such as failure of elevators or electricity, the abatement may not begin for many days. The tenant should evaluate the costs of obtaining business interruption insurance that will cover the costs of rent payments that the tenant is obligated to pay even when its business is interrupted.