Property manager’s fees are normally considered “continuing expenses” in business income claims. The standard Business Income (And Extra Expense) Coverage Form CP 00 30 04 02 says, "We will pay for the actual loss of Business Income you sustain due to the necessary ‘suspension’ of your ‘operations’ during the ‘period of restoration.’" Business Income is defined as:
- Net Income (Net Profit or Loss before income taxes) that would have been earned or incurred; and
- Continuing normal operating expenses incurred, including payroll.
Notwithstanding the standard practice of calculating property manager’s fees as a continuing expense of the business operation, I came across an interesting article in the FC&S Bulletin regarding the recoverability of these fees that is worth sharing so that everyone can avoid similar coverage disputes:
Business Income—Status of
Many of our clients have property management firms who manage their apartment buildings and commercial properties for a percentage fee based on rental income. Frequently, the management agreements call for the firms to be paid an additional fee for any construction management services performed following a property loss.
In our opinion, both these fees should be covered as part of the property owner’s business income loss following a covered property loss. However, following a recent covered loss to a large commercial complex containing many leased offices, the adjuster refused to allow either the continuing management fee or the additional fee, stating that both of these were "agreements outside the policy" and therefore not covered.
Specifically, the adjuster pointed to exclusion 4.c.(2) of the CP 10 30 06 95, which eliminates coverage for certain contractual liability assumed by the insured. Not only did he disallow coverage for the additional fee, but for the on-going management fee as well.
Our insured has the [sic.] with business income and extra expense CP 00 30 06 95 attached.
What do you think?
The covered direct physical loss to the insured property is the trigger for business income coverage. In the CP 00 30 business income and extra expense form, the insurer promises to pay the net income that would have been earned and continuing normal operating expenses, including payroll.
There is no descriptive or restrictive language in the form detailing what "normal operating expenses" are comprised of. And, although the adjuster may think that this "operating expense" does not continue because there is nothing to manage, this is not necessarily the case. For example, when property is completely destroyed, then maintenance expense—money paid to an outside firm—for building and machinery might discontinue. However, these expenses might well continue if the property is only partially destroyed and if the insured is obligated by contract to continue payment.
The ongoing management fees may be viewed in the same light. If the management fee does not discontinue in event of a covered loss, it therefore is a part of the normal operating expense covered by business income.
The second part of the business income coverage is for extra expense. The CP 00 30 defines extra expense as "necessary expenses [the insured] incur[s] during the ‘period of restoration’ that [the insured] would not have incurred if there had been no direct physical loss or damage." Further, the extra expense must be for the purpose of avoiding or minimizing the suspension of business and allowing the insured to continue "operations" at the described premises.
The management company’s function in this instance is to supervise the leased space construction; since the management company is presumably in a better position to expedite the restoration of the damaged building, the adjuster cannot arbitrarily disallow the fee. If the management company’s intervention minimizes the suspension of business by making sure the premises are restored quickly to the preloss condition, then the fee is covered.
The adjuster’s citing of exclusion 4.c.(2) is inappropriate, since this exclusion is prefaced by the language (under 4. special exclusions) that "the following provisions apply only to the specified coverage forms." Exclusion 4.c.(2) relates to the legal liability coverage form; specifically the insured’s assumption of liability in a contract or agreement. The exclusion precludes coverage, for example, for a hold harmless agreement in which the insured assumes liability rightfully belonging to another. It is not applicable in this situation.
As stated in the FC&S Bulletin, property manager’s fees incurred after a loss to assist in the mitigation of damages above may also be recovered as an extra expense under the policy. A standard extra expense coverage form states "extra expense" means" necessary expenses you incur during the ‘period of restoration’ that you would not have incurred if there had been no direct physical loss or damage to property." These extra expenses include those "to avoid or minimize the suspension of business and to continue ‘operations’ at the described premises, or at replacement premises or at temporary locations."
It is also likely that courts will allow recovery of the property manager’s fees. For example, in Cotton Bros. Banking v. Industrial Risk Insurers, 951 F.2d 54 (5th Cir. 1992), the court granted coverage for security expenses to avoid theft of a damaged business property. Also, in Northwestern States Portland Cement Co. v. Hartford Fire Ins. Co., 360 F.2d 531 (8th Cir. 1996), under a business interruption endorsement containing an "extra expense" clause, the insured was able to avoid a loss of earnings by using available raw materials to continue production; the extra cost involved in producing replacement raw materials was recoverable, although the total cost of such materials was not.