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Author: 
 
 Hooper, George G. 
 
 Title: 
 
 Leasehold insurance 
 
 Place: 
 
 [New York] 
 
 Date: 
 
 [1920] 
 
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 816 
 
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 Hooper » George G 
 
 Leasehold insurance: an address delivered 
 before the one htihdred and fifty- second meeting of 
 The insurance society of New York, on Tuesday, 
 January 26th, 1920, by George G. Hooper. f2d ed.^ 
 jNew York 3 Hooper |-19203 
 
 15 p* 23 cm. 
 
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Columbia Winititxiitp 
 
 LIBRARY 
 
 School of Business 
 
0\H «f th 
 
 A irtSMWHH 
 
 LEASEHOLD 
 INSURANCE 
 
 AN ADDRESS 
 
 Delivered before the one hundred 
 and fifty-second meeting of 
 
 The Insurance Society of New York 
 on Tuesday, January 26th, 1920 
 
 by 
 
 GEORGE G. HOOPER 
 
 SCHOOL OF BUSINESS 
 
 
 
 DARBY, HOOPER & Mc DANIEL 
 
I 
 
 T 
 % 
 
 liii 
 
 INTRODUCTION 
 
 IT IS a matter of some regret 
 to me that the topic for this 
 afternoon was not assigned to 
 some one whose experience extends 
 beyond the local field. 
 
 But, as you all know, our secre- 
 tary has set us such an example of 
 zeal and devotion to the interests 
 of the Insurance Society that one 
 would feel ashamed to refuse any 
 service that he might request and 
 I am glad to make a small partial 
 payment on account of the debt 
 that I personally owe to the Soci- 
 ety. 
 
 I 
 
Leasehold Insurance 
 
 Gentlemen : 
 
 It is as true in the insurance business as in any other human 
 activity that knowledge is the result of experience. The inter- 
 pretation of the fire insurance contract in its application to the 
 actual circumstances of numberless claims has built up a body of 
 law and of practice by which we are guided in our conduct of the 
 business. 
 
 There are probably few subjects of equal importance con- 
 nected with the business concerning which there is less formal 
 information or instruction than that of Leasehold Insurance. This 
 is due in part to the fact that the serious losses have been compara- 
 tively few and litigated claims quite rare. 
 
 For this reason this paper is offered in full appreciation of 
 the fact that it is only an attempt to combine in one more or less 
 comprehensive discussion the rather fragmentary statements of a 
 few writers and the views of some of our underwriters and loss 
 adjusters who have been interested in the subject. 
 
 Many possible variations that are not directly discussed will 
 occur to you, but it is hoped that the general principles will be 
 made sufficiently clear to point the way to the solution of each 
 particular problem. 
 
 The practice of insurance against loss by fire was for many 
 years largely confined to the protection of visible property, such as 
 buildings, household goods, merchandise, machinery, appliances, 
 etc., but with the growing recognition of the advantage of insur- 
 ance there has come about an increasing demand on the part of 
 the public for protection against incidental losses resulting from 
 
 i 
 
the destruction of the building, the loss of anticipated profits to 
 the merchant on his stock of goods, the loss of the opportunity of 
 profitable production to the manufacturer, the loss of anticipated 
 commissions to the selling agent or factor. 
 
 These incidental losses are no less real than the property 
 losses, but they may be more difficult to estimate or appraise and 
 when insured the contract will usually contain some rule by which 
 the loss is to be measured. Rent insurance is usually based on the 
 annual rent of the building and only a pro rata proportion is col- 
 lectible for the term between the date of the fire and the time 
 when the building could with ordinary diligence be restored. 
 Commission or Profit insurance usually fixes an agreed percentage 
 to be paid either on the sound value of the goods damaged or de- 
 stroyed or on the amount of loss to merchandise as finally adjusted. 
 Use and Occupancy or Business Interruption insurance usually 
 fixes a per diem loss of i /300th, or other named fraction of the 
 total amount of insurance for each day of total interruption or 
 production. 
 
 One of the incidental losses which may be and often is sus- 
 tained is the loss of use by a lessee of the premises leased to him, 
 insurance against which is the subject of our present consideration. 
 
 A Lease is a conveyance of lands or tenements, usually in 
 consideration of rent, for life, for years or at will, but always for 
 a less term than the lessor has in the premises. 
 
 While a lease may be for an indefinite term (for life or at 
 will) we shall consider only the lease for a definite term, as it 
 would be difficult if not impossible to determine the value of a 
 lease in the absence of a definite term. 
 
 When unimproved property or land is leased and such im- 
 provements as may be made are at the cost of the lessee, the lease 
 is not usually terminated by destruction of, or damage to the im- 
 provement. In such a case the lessee has the right to insure his 
 improvement and to replace it. He suffers also an interruption 
 of his use exactly as the lessor or owner would if he had made the 
 improvement and can insure his rents under the usual forms of 
 rent insurance. 
 
 When the leased premises consist of or comprise an improve- 
 ment or building or a part of it, the building remains the property 
 
 4 
 
 of the owner or lessor and the lessee has an insurable interest in 
 the value of his lien for occupancy, but he has no interest in the 
 building.* 
 
 If a lease of improved property is not terminated by the de- 
 struction of the building by fire or otherwise and the lessee is 
 required to continue to pay rent without interruption, that loss 
 also is properly covered by rent insurance. 
 
 An insurable leasehold interest exists whenever some addi- 
 tional valuable consideration has been paid for its possession, over 
 and above the considerations stipulated in the lease, or whenever 
 any expenditure for improvements has been made or whenever 
 the possession of a lease results in a profit to the lessee, and when 
 in either of these cases (or in any combination of them) the occur- 
 rence of a fire would terminate the lease and cause a loss to the 
 lessee of the purchase price or bonus, or of his investment in im- 
 provements or of his prospective profit or all of them together. 
 
 It may be well to point out here that the profit to be derived 
 from conducting a business is something separate and distinct from 
 the earning power of the premises as real estate, and that, properly 
 speaking, leasehold interest has to do with the earning power of 
 the real estate. The conducting of any business is not necessarily 
 limited to a specific location. 
 
 The profitable use of the means of production or service may 
 be interrupted or destroyed, but can be restored or duplicated 
 elsewhere in time. "Use and Occupancy" or "Business Interrup- 
 tion" insurance covers such losses and usually assumes one year as 
 the maximum time necessary for such restoration or duplication. 
 But when a long term lease yielding an annual profit to the lessee 
 is terminated for any cause, the lessee's loss is final and total. 
 The building may be restored or rebuilt by the owner, but he will 
 then rent the premises on the basis of current rental values and 
 himself enjoy the advantages of higher rental, which the lessee 
 previously had. 
 
 A possible exception might be made in the case of "good 
 will" when that depends on the location of the business rather 
 than on the name or reputation of the lessee or on the character 
 of the article he sells. If the location is peculiarly adapted to the 
 
 •Griswold, Fire Underwriters' Text Book, 689. 
 
} 
 
 business and no other location can be secured, the good will of the 
 business will be lost by the cancellation of the lease. 
 
 The value of the good will is difficult to determine, is largely 
 involved with the activity of the individual and is possibly subject 
 to exaggeration. To the extent that it can be defined it may 
 properly be insurable, but should be written with caution.* 
 
 It would seem to be a reasonable assumption that, at the time 
 of the signing of a lease, the amount of rent or other consideration 
 paid is the full rental value and that there can be no definite or 
 insurable profit to be gained by the lessee from the possession of 
 the lease as such, but it is even then quite possible that the lessee 
 may have secured the premises for less than actual value, through 
 the ignorance of the lessor, or owing to his pressing necessities or 
 for other reasons. In such cases there may be an actual pros- 
 pective profit from the beginning. 
 
 The true measure of the value of the leasehold is the differ- 
 ence between the consideration paid for the premises and the actual 
 net rental value to the lessee. The consideration paid may be an 
 agreed rent of so much, monthly, quarterly or annually ; or there 
 may be in addition to the fixed rent, an obligation to pay taxes, 
 interest, water rent and other maintenance charges, and possibly 
 an agreement to improve the property in some specified way or by 
 the expenditure of a specified amount — all of these items taken 
 together make up the sum of the rent paid. 
 
 The rental value to the lessee, if he occupies the premises 
 himself, is the amount for which the premises could be sublet, or 
 the amount which he would be obliged to pay for the same space 
 in an equally good neighborhood and under equally desirable con- 
 ditions. If the premises are rented to sub-tenants, then the amount 
 of rent actually received would establish the rental value of the 
 premises, or, if a portion is occupied by the lessee and the rest sub- 
 let, then the rental value of his own space should be added to the 
 rent received from his sub-tenants. 
 
 There is usually a fairly well-established standard of rental 
 values and any qualified real estate agent or operator will be able, 
 from his general knowledge of conditions, to estimate the value 
 in any given case and furnish a check on the lessee's estimate where 
 any part of the premises is occupied by the lessee. 
 
 'Eastern Underwriter, 9-29-16. 
 
 8 
 
 From this rental value when ascertained there should be de- i 
 ducted such maintenance charges, other than those required by } 
 the lease, as would be suspended or terminated by the untenantable ] 
 condition of the premises. 
 
 Having established the net annual rental value of the prem- 
 ises, there should be deducted the amount of annual rent in what- 
 ever form it may be paid by the lessee and the remainder is the 
 lessee's annual profit, or in other words, the annual value of his 
 leasehold interest. If the lease has more than one year to run, 
 the annual profit should be multiplied by the number of years in 
 the unexpired term of the lease to arrive at the total value of the 
 leasehold. If the lease gives the lessee the option of a renewal for 
 a further term or terms, then the annual profit may be multiplied 
 by the full number of years to the end of the extended term. If 
 the renewal privilege can be exercised only by the payment of an 
 increased rent, the calculation must be made for the renewal term 
 on the basis of that increased rent.* 
 
 All of this is equally true whether the leased premises consist 
 of an entire building or only a part of it, and applies not only to 
 the original lessee, renting from the owner, but also to each of 
 the persons to whom he may sublet all or a part of the premises 
 leased by him, and in turn to their sub-tenants, so that an insur- 
 able leasehold interest may be possessed at the same time by a series 
 of tenants and sub-tenants. 
 
 Cases like the following are of actual occurrence : 
 "A" rents a certain building for $5,000 a year for twenty 
 years: at the end of the first year "A" sublets to "B" 
 for $6,000 a year for the remainder of the term (19 
 years at $1,000.) "AV* prospective profit $19,000 
 
 Four years later "B" sublets to "C" for $8,000 (15 years 
 
 at $2,000) . "B's" prospective profit 30,000 
 
 Five years later "C" sublets to "D" for $10,000 ( 10 years 
 
 at $2,000). "C's" prospective profit 20,000 
 
 Each of these lessees— "A," "B" and "C"— has an insurable 
 
 interest in the lease he holds for the amount indicated. 
 
 Such value as the leasehold has may have been created in one 
 or more of the following ways : 
 
 •Griswold, Fire Underwriters' Text Book, 275. 
 
 iH 
 
2. 
 
 I. The lessee may have improved the building in appearance, in 
 convenience or in size by the expenditure of money or labor. 
 He may charge up the outlay as a part of his rent, writing ofE 
 a ratable proportion each month during the term of his lease, 
 or he may insure his interest in such improvements separately. 
 Sometimes a wise expenditure for improvements will add to 
 the rental value out of all proportion to the amount so spent. 
 It frequently happens that the owner is without the resources 
 to make such improvements himself or lacks the imagination 
 to devise or the confidence or initiative to make a profitable 
 improvement. Or the property may be an estate which for 
 various reasons is so involved or tied up that no expenditures 
 can be made on improvements. 
 
 Successful real estate operators recognize opportunities 
 which are overlooked by others, and having the courage of theii 
 convictions, they have the spirit and energy to carry their plans 
 to a successful realization. 
 
 The character of the neighborhood may have improved by the 
 erection of new buildings, attracting a higher class of tenant$ 
 or changing the course of traffic. (The erection of the Penn- 
 sylvania Railroad Station at Seventh Avenue and 32nd Street 
 in this City does both and will gradually revolutionize that sec- 
 tion. Real estate values increased instantly and largely from 
 the moment the project became known. The most conspicuous 
 result up to the present time is the Pennsylvania Hotel.) 
 
 By the shifting of a business centre. Merchants in a given 
 line of trade as shoes, woolens, crockery, hardware, leather, 
 tend to keep together, and when one or two leaders move to 
 an entirely new locality, attracted by larger space and lower 
 rent, the others are likely to follow. (The Fifth Avenue 
 shopping district in New York is a good illustration of this; 
 also the wholesale silk business, relocated in the neighborhood 
 of Fourth Avenue and 23rd Street.) 
 
 4. New or improved transportation facilities lik« the construction 
 or extension of surface, elevated or subway car lines increase 
 the rental value of all property affected. 
 
 5. An increased population, attracted by some new and large in- 
 dustry, creates greater housing and trading demands. 
 
 10 
 
 3. 
 
 • 
 
 6. The natural growth of the population, which is one inevitable 
 factor that must be taken into account in every large city. 
 
 7. An increased cost of building materials or labor, or both, im- 
 mediately enhances the value of all existing structures. At 
 the present time this condition affects, in some degree, all rental 
 values, and probably every lessee in all the large centres, 
 whose lease was made a year or more ago, could demonstrate 
 an insurable leasehold interest. If he occupies the leased prem- 
 ises himself, he knows he cannot secure equivalent accommoda- 
 tions except for a substantial increase over the amount he now 
 pays. If he sublets, he has already raised his rents or will do 
 so as soon as the leases fall in. 
 
 Having considered the various ways in which a leasehold 
 interest may be acquired or augmented, we will now see whether 
 that interest may become impaired, and how. 
 
 All of the conditions which have been discussed, as adding 
 value to a leasehold, may be reversed. The building may de- 
 teriorate from the lack of necessary repairs; the erection of ad- 
 joining buildings may shut off light or air or bring undesirable 
 tenants or processes; a trade centre may move away; transporta- 
 tion facilities may be reduced or discontinued; population may be 
 attracted to other more desirable localities; reduced labor and 
 material costs may result in the erection of newer and better 
 buildings which can be profitably rented at a lower range of rents. 
 All of these conditions have been experienced at various times and 
 in various places, and the lessee can only feel assured of his pros- 
 pective profit for the period for which he has actually sublet at a 
 profit, and even then the insolvency of his tenants may oblige him 
 to secure others on a less profitable basis, or possibly on terms that 
 involve him in an actual loss. There is a speculative factor in all 
 such transactions that must not be disregarded or disappointment 
 or even disaster may follow. 
 
 The terms of the contract itself as it bears on the security of 
 the lessee in the enjoyment of his lease must also be considered. 
 
 The lessee undertakes to do certain things and to refrain from 
 doing other things, and a default on his part may enable the lessor 
 to terminate the lease in accordance with its conditions. 
 
 Fire, flood, earthquake, war or insurrection may result in the 
 destruction of the building or render it untenantable — and every 
 
 11 
 
it 
 
 if 
 
 properly drawn lease provides what eflFect such occurrences shall 
 have on the contract, and in the absence of some provision, the law 
 of the land, either the common law or some statutory provision, 
 will determine. 
 
 At common law and in any State in which the common 
 rule has not been changed by statute, a lessee must pay rent during 
 the term whether the building is destroyed or not, unless some 
 clause in the lease expressly provides to the contrary.* 
 
 Under this rule (the common law) the land was consid- 
 ered the most important part of the leased premises and the lessee 
 was bound to go on paying rent even after destruction of the 
 building.** 
 
 The New York Statute is as follows: "When any building 
 which is leased or occupied is destroyed or so injured by the ele- 
 ments, or any other cause, as to be untenantable and unfit for 
 occupancy, and no express agreement to the contrary has been 
 made in writing, the lessee or occupant may, if the destruction of 
 injury occurred without his fault or neglect, quit and surrender 
 possession of the leasehold premises, and of the land so leased or 
 occupied ; and he is not liable to pay the lessor or owner rent for 
 the time subsequent to the surrender." 
 
 The New Jersey Statute is as follows: "Whenever any 
 building or buildings erected on leased land shall be injured by 
 fire without the fault of the lessee, the landlord shall repair the 
 same as speedily as possible, or in default thereof, the rent shall 
 cease until such time as such building or buildings shall be put in 
 complete repair; and in case of the total destruction of such build- 
 ing or buildings by fire or otherwise, the rent shall be paid up to 
 the time of such destruction, and then, and from thenceforth, the 
 lease shall cease and come to an end; provided always that this 
 section shall not extend to or apply to cases where the parties have 
 otherwise stipulated in their agreement of lease." 
 
 The clause in a lease which defines the status of the contract 
 in the event of fire is commonly called the Fire Clause and in the 
 most frequent form will read about as follows: "In case the 
 building erected upon said premises shall be partially damaged by 
 fire, the same shall be repaired as speedily as possible at the ex- 
 
 *N. Y. Journal of Commerce, 8-10-06. 
 ••N. Y. Journal of Commerce, 10-13-10. 
 
 
 pense of the landlord, and in case said damage shall be so exten- 
 sive as to render the building untenantable, the rent shall cease 
 until such time as the building shall be put in repair, but in case 
 of the total destruction of the building upon said premises by fire 
 or otherwise, the rent shall be paid up to the time of such de- 
 struction, and then and thenceforth this agreement shall termi- 
 nate, provided, however, that such damage or destruction be not 
 caused by the negligence of Tenant." 
 
 There are many variations from this form, of which a few 
 examples are given : "If fire shall occur in the premises, the land- 
 lord shall have the option of terminating the lease." "If the 
 building shall be damaged to the extent of 25% (or other fixed 
 percentage), the lease may be terminated at the option of the land- 
 lord." "If the premises shall be rendered untenantable, the lease 
 shall terminate." "If the building shall be so damaged that the 
 landlord shall decide not to repair." "If the building shall be so 
 damaged that the landlord shall decide to rebuild." Each of 
 these provisions creates the possibility of a termination of the lease. 
 Some specified extent of damage or destruction either terminates 
 the lease or gives the lessor or the lessee the option of doing so. 
 
 Too much confidence (nust not be placed in the words "totally 
 destroyed." The courts have held that total destruction, within 
 the meaning of the contract, is accomplished when the damage is 
 so extensive as to necessitate substantially the rebuilding of the 
 premises. 
 
 Whenever the lessor has an option to exercise, it may be 
 confidently assumed that in proportion as the lease is valuable to 
 the lessee, the lessor will be anxious to break it, and when the 
 language is loose or indefinite, the lessor will endeavor to secure 
 an interpretation of the clause that will be most advantageous to 
 him. The present condition of high rental values due to the 
 shortage of buildings is certain to result in efforts to cancel leases 
 that in normal times would not be disturbed. 
 
 We have seen that a lease may acquire a value in excess of 
 the amount of rent paid, that such value over a period of years in 
 a long term lease may amount to a considerable sum, that the 
 occurrence of a fire may terminate the lease and thereby cause an 
 actual loss to the lessee of his prospective profit, and that profit 
 becomes a proper subject of fire insurance. 
 
 13 
 
tid 
 
 i 
 11 
 
 The examination of a considerable number of leases justifies 
 the belief that possible future value is rarely given any considerar 
 tion virhatever at the time the lease is prepared, due no doubt, to 
 the fact that most leases are made only for occupancy, and very 
 iew with a definite view to profit for the lessee, and in those cases 
 the lessee may fear to disclose his expectations until the lease has 
 been secured. 
 
 As a result, the only protection for the owner of a valuable 
 leasehold in the event of fire is to carry adequate insurance. 
 
 As fire insurance underwriters, we are interested in develop- 
 ing a demand for this additional class of business. The creation 
 of a demand for such forms of insurance as Rent, Use and Occu- 
 pancy, Profit and Commission and Leasehold is as effective from an 
 income producing standpoint as the building of new cities or even 
 the development of new states. But we are not only interested in 
 producing income, but of earning a profit on the business written, 
 and it is therefore of importance that we should understand as 
 clearly as possible what risk is undertaken so that we may judge 
 whether it is desirable. 
 
 The extent to which the lessee can suffer by fire can only be 
 decided when the conditions are known, and they are as various 
 as the needs and desires of the two parties to the contract may 
 require. 
 
 As far as possible all the facts should be known and certain 
 of them should be incorporated in the policy. The application 
 should recite the unexpired term of the lease and the monthly 
 value of the leasehold over and above the rent paid, and insurance 
 should be carried for an amount equal to the monthly value multi- 
 plied by the number of months in the unexpired term of the lease. 
 The method of arriving at this value should be known, and if it 
 is an estimated value, it should commend itself to your judgment 
 as fair and reasonable. 
 
 The conditions under which the lease can be terminated in 
 consequence of fire should be stated, and preferably the "fire 
 clause" of the lease should be quoted in full and made a part of 
 the contract. 
 
 The loss should be limited to the value for the unexpired 
 term from the date of the fire, so that the amount collectible is 
 reduced ratably each month during the continuance of the policy. 
 
 14 
 
 It is usual to provide, in the event of a fire rendering the 
 premises untenantable but not terminating the lease, that the 
 Company shall pay an amount equal to the monthly value stated 
 during the time the premises are untenantable. 
 
 With this information and under these conditions, we must 
 consider the probability of loss as we would the hazard of any 
 undertaking, considering the construction of the building, its pro- 
 tective equipment, such as automatic sprinklers, the general fire 
 hazard and what the probabilities are that a fire would damage 
 the building enough to terminate the lease in accordance with its 
 conditions. 
 
 When the premises, the subject of the lease, is a single floor, 
 or loft, it may more easily be destroyed within the meaning of the 
 contract and the risk is relatively less desirable. 
 
 If any damage short of total destruction is specified, the risk 
 is greater, as the required extent of damage decreases. 
 
 Any lease giving the lessor the option of cancellation in con- 
 sequence of a moderate damage is a very hazardous subject of 
 insurance. 
 
 This entire subject is of great interest and of almost infinite 
 variety and will well repay your further thought and study. 
 
 15 
 
BIBLIOGRAPHY 
 
 Leasehold Insurance 
 
 "An Attorney 
 
 Leasehold Insurance Interest. (Pro- 
 ceedings Fire Underwriters* Association 
 of Pacific, 1908.) 
 
 Eastern Underwriter September 29, 1916; p. 16. 
 
 Griswoldj Jeremiah T. 
 
 Hoey, James J. 
 
 Levy, Leo, 
 
 Medlicott, William B. 
 
 Moore, Francis C, 
 
 fVilliams, T, H. 
 
 Fire Underwriters' Text-book: pages 
 275 and 689. 
 
 Letter, January 20, 1920. 
 
 Use and Occupancy, profits and com- 
 missions, rents and leasehold insurance. 
 (Address before The Insurance Society 
 of New York, January, 191 7.) 
 
 Lectures on Fire Insurance, Insurance 
 Library Association, p. 306: 31 1-3 12. 
 
 Fire Insurance and How to Build, p. 
 294: 587. 
 
 Insurable Interest. (Proceedings Fire 
 Underwriters* Association of Pacific, 
 1911.) 
 
 (SECOND EDITION, PRINTED NOVEMBER, 1920) 
 
COLUMBIA UNIVERSITY LIBRARIES 
 
 This book is due on the date indicated below, or at the 
 expiration of a definite period after the date of borrowing, as 
 provided by the library rules or by special arrangement with 
 the Librarian in charge. 
 
 DATE ■OimOWCO 
 
 Feb22 Si 
 
 DATE DOC 
 
 DATE BOWROWeO 
 
 DATE DUE 
 
 C28(3-B2)100M 
 
 iilBPllPPPiaiirssip^^^ 
 
 7" 
 
 816 
 
 mioli? 
 
 Hooper 
 
 Leasehold insurance 
 
 /n$w mic 
 
 NEH 
 
 FEB 2 8 1995 
 
 COLUMBIA UNIVERSITY LIBRARIES 
 
 0041430417 
 

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