How does business interruption insurance work for apartment buildings?

Business interruption insurance for apartment buildings is typically referred to as loss of rents or rental value coverage. It compensates the apartment owner for the net rental income lost when a covered peril (such as fire, storm, or water damage) renders units uninhabitable and tenants must vacate while repairs are completed. The ISO Business Income coverage form (CP 00 30) and the Rental Value coverage option within it provide the policy framework used by most insurers for apartment building loss of rents protection.

The coverage calculation considers the gross rental income that the affected units would have generated during the restoration period, minus any expenses that do not continue during the vacancy (the primary discontinued expense is usually utilities for the vacant units). The restoration period begins after a short waiting period (commonly 72 hours) and extends for the time it reasonably takes to repair the property, up to the maximum period stated in the policy.

Several factors affect the adequacy of business interruption coverage. The coverage limit should reflect the total rental income the property could lose in a worst-case scenario. The maximum restoration period should be long enough to account for major losses that may take 12 to 18 months to repair. Extended business income coverage, available as an endorsement (ISO CP 15 15), continues payments for a period after repairs are complete to account for the time needed to re-lease vacated units.

Apartment owners should review their loss of rents coverage annually to ensure the limits reflect current rental rates, which may have increased since the policy was last reviewed. Fannie Mae's Multifamily Selling and Servicing Guide (Part III, Chapter 6) requires loss of rents coverage for a minimum of six months of gross potential income, while HUD's MAP Guide (Chapter 7) requires at least six months of rental income coverage for FHA-insured multifamily properties.