A “Loss Of Rent” Provision Was Ambiguous
Ventura Kester, LLC v. Folksamerica Reinsurance Company
(Cal. Ct. of App., 2d Dist.), filed September 11, 2013, published September 11, 2013
Ventura Kester owned a commercial building. Folksamerica Reinsurance Company provided property insurance on the building. At the time the policy was issued, a tenant leased the property.
The policy provided up to $2.76 million for structures and $552,000 for lost rents as a result of damage to a covered structure. The policy stated: “Subject to the terms, conditions and limitations of this policy, we insure you against financial loss resulting from: 1. direct physical loss of or damage to covered property caused by an accident; and 2. the enforcement of any ordinance, law or code which prohibits repair of a covered structure damaged by an accident and requires that any undamaged portion of the structure be demolished; and 3. rents including accrued rents which become uncollectible, and extra expenses incurred to prevent loss of rents, because of damage to or destruction of covered structures caused by an accident.”
The tenant that was in the building when Folksamerica issued its policy left, and Ventura Kester entered into negotiations for a new tenant. While the building was vacant, it was severely damaged by vandals.
Ventura Kester made a claim to Folksamerica. Folksamerica and Ventura Kester eventually reached an agreement as to the amount of the structure’s damage loss. However, Folksamerica declined to pay for lost rents because at the time of the loss, the building was vacant and Ventura Kester was collecting no rent.
Ventura Kester sued Folksamerica for breach of contract and breach of the covenant of good faith and fair dealing. It alleged that it was entitled to lost rent at a monthly rental rate of $100,000 for a total loss of rent of $3.8 million. Ventura Kester also sued its insurance broker for professional negligence.
Ventura Kester and Folksamerica filed competing motions for summary judgment. The trial court granted Folksamerica’s motion.
HOLDING & REASONING
The Court of Appeal reversed and remanded. It concluded the lost rents provision was ambiguous, and that a policyholder would have a reasonable expectation of coverage for rents that were actually lost as a result of the property damage regardless of whether there was then a lease in place.
The court rejected Folksamerica’s argument that the provision for loss of rents should be interpreted narrowly to mean rent from an existing tenant which is uncollectible as a result of damage to the covered property. It did so because the plain language of the policy did not limit recovery or calculate lost rents in the manner Folksamerica urged. It noted that “the provisions provide coverage for the loss of rents the owner would have collected, but for the property damage.”
The court also rejected Folksamerica’s argument that it was entitled to summary judgment because Ventura Kester could not establish any actual loss of rents as a result of the property damage. The court found a triable issue of fact as to whether Ventura Kester actually lost rent. Although Folksamerica presented evidence as to certain prospective tenants and their reasons for not renting the premises, it did not conclusively negate the possibility Ventura Kester could have rented the premises to other possible tenants.
This case offers a reminder of how challenging it can be to predict the outcome of policy interpretation disputes. The trial court felt that the provision addressed existing, actual rent, while the appellate court read the same words to reach broader categories of “loss of rents.”