Ventura Kester LLC v. Folksamerica Reinsurance Company

In Ventura Kester LLC v. Folksamerica Reins. Co., 219 Cal.App.4th 633 (September 11, 2013), the California Second District Court of Appeal reversed the trial court’s entry of summary judgment in favor of Folksamerica Reinsurance Company (“Folksamerica”) regarding a coverage dispute arising out of Ventura Kester LLC’s (“Ventura”) tender of a first party property damage loss sustained by a commercial building that it owned as a result of vandalism. At the time of the loss, the building was vacant. During the time period prior to the loss, Ventura had been considering offers from prospective tenants but ceased active attempts to rent the building after a loss due to its position that the property needed to be repaired before entering into a lease agreement with a commercial tenant.

Folksamerica settled Ventura’s property damage loss. However, it declined to pay Ventura’s claim for the lost rental income. Thereafter, Ventura filed a complaint for breach of contract and bad faith against Folksamerica. Ventura alleged that it was entitled to lost rent from May 2007 through July 2010, for a total loss of rent of 3.8 million dollars.

Subsequently, the parties filed cross motions for summary judgment in the trial court. Thereafter, the trial court found that the plain language of the Folksamerica policy did not provide coverage for lost rents when there was no tenant in the building.

In reversing the trial court’s decision, the Court of Appeal stated as follows:

Ventura contends the policy covers lost rents during the time required to repair the property damage, regardless of whether there was an existing tenant. Folksamerica contends the policy covers lost rent only if Ventura had a tenant in place. We conclude the lost rents provision is ambiguous, and the policyholder would have a reasonable expectation of coverage for rents that were actually lost as a result of the property damage.

Insurance against the loss of rental income is a form of business income coverage. (11 Couch on Insurance (3d ed. 2005) § 167:1, pp. 167-6-167-7.) “A lessor’s ‘rent insurance’ or ‘rent loss insurance’ provides reimbursement for loss of rents actually sustained by the owner or lessor of property on occupied portions of premises, which are caused to be untenantable, for the period of time necessary to restore the property to tenantable condition.” (Id., § 167:26, p. 167-33.)

The policy provisions at issue in this case are ambiguous. The policy provides coverage against the loss of rents due to damage to a covered structure. Subject to express limitations, the insurer promises to pay the insured’s net loss of rental income. Folksamerica suggests 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. However, the plain language of the policy does not limit recovery or calculate lost rents in this manner. The provisions provide coverage for the loss of rents the owner would have collected, but for the property damage. Rental property is often vacant between tenants. Ventura's policy provided coverage for damage to the building regardless of whether the property was vacant. An owner of rental property often depends on income from rent payments to cover fixed costs, such as mortgage payments, utilities, and taxes. If the building would have been rented to a new tenant but for the property damage, the owner has lost the rents that would have been received from a new tenant. Since the owner's need for rental income and loss of rental income did not depend on having a tenant in place at the time of the covered incident, it was reasonable for the policyholder to expect the policy covered the owner's actual lost rent as a result of the damage and did not depend on the fortuity of having a tenant in place when the damage occurred.

The Court of Appeal also held that there was a triable issue of fact relative to whether, in fact, Ventura lost rents due to the damage sustained by the building as a result of vandalism. As such, the case was remanded to the trial court to address this issue.