Loss of Rent: How Insurers Calculate It (And How Much You Need)

Introduction: what “loss of rent” actually covers

Loss of rent (sometimes called rental income cover) is designed to replace the rent you would have received if a property becomes uninhabitable due to an insured event—for example, a fire, flood, escape of water, storm damage, impact, or malicious damage (depending on your policy wording).

It typically sits within:

• Commercial property insurance

• Landlord insurance

• Commercial combined insurance

Loss of rent is not the same as:

• Rent guarantee insurance (covers tenant non-payment)

• Void periods between tenancies

• Market downturns or rent reductions

In plain English: if the building can’t be occupied because of insured damage, loss of rent can keep cashflow stable while repairs are completed.

The two numbers that matter: sum insured and indemnity period

Insurers usually calculate loss of rent using two key inputs:

1. Sum insured (annual rent figure)

2. Indemnity period (how long cover lasts after a claim)

Get either wrong and you can end up underinsured—meaning you may not receive the full amount you expect.

1) Sum insured: your annual rental income

Most policies ask for the annual rent (or “annual rental value”). This is often the maximum the insurer will pay for loss of rent during the indemnity period.

Depending on the insurer, the sum insured may be based on:

• Current contracted rent (leases/ASTs)

• Passing rent (rent currently being paid)

• Estimated rent (if vacant but lettable)

• Gross rent vs net rent (varies by wording)

2) Indemnity period: how long it could take to get back to normal

The indemnity period is the maximum time the insurer will pay loss of rent after insured damage.

Common options include:

• 6 months

• 12 months

• 18 months

• 24 months

• 36 months (more common for complex commercial risks)

The right indemnity period depends on how quickly you could realistically:

• Assess damage

• Obtain approvals (planning, building control, landlord/freeholder consent)

• Tender and appoint contractors

• Complete repairs n- Re-let the property (if tenants move out)

How insurers calculate loss of rent in practice

Loss of rent is usually calculated as:

$$ \text{Loss of Rent Payable} = \text{Rent you would have received} - \text{Rent actually received} $$

Then the insurer applies the policy terms, such as:

• The indemnity period

• Any policy excess

• Any average/underinsurance clause

• Any limitations (e.g., only for insured perils)

Step-by-step example (simple)

Assume:

• Monthly rent: £2,000

• Property uninhabitable after a fire

• Repairs take 5 months

• Tenant can’t occupy and stops paying

Potential loss of rent:

• £2,000 × 5 = £10,000

If your policy covers fire and you have a 12-month indemnity period, the time element is fine. The key question becomes whether your sum insured is adequate.

Example with partial occupancy

If a multi-let building has 4 units and only 2 are affected:

• Unit A rent: £1,200/month (affected)

• Unit B rent: £1,100/month (affected)

• Unit C rent: £1,300/month (unaffected)

• Unit D rent: £1,400/month (unaffected)

Loss of rent is based on the affected units only (subject to wording). If Units A and B are out for 6 months:

• (£1,200 + £1,100) × 6 = £13,800

The “average” clause: the underinsurance trap

Many loss of rent sections are subject to average. That means if you under-declare your annual rent, the insurer may reduce the claim proportionately.

Underinsurance example

Actual annual rent: £60,000 Declared annual rent (sum insured): £45,000 You are insured for 75% of the correct figure.

If you claim £20,000, the insurer may pay:

• £20,000 × 75% = £15,000 (before any excess)

This is one of the most common reasons landlords and commercial property owners feel “surprised” by a settlement.

How much loss of rent cover do you need?

There’s no one-size-fits-all number. The right level depends on your rent, your risk profile, and how quickly you can rebuild.

A practical method to set the sum insured

Start with your annual rent and then consider whether you need to adjust for:

• Rent reviews due during the policy period

• Indexation (if rent is linked to RPI/CPI)

• Service charge elements (depending on whether they are included in rent and how the policy defines “rent”)

• Expected occupancy (for multi-lets)

If you have stable leases, the annual rent is usually straightforward. If you have frequent turnover or seasonal income, you may need a more conservative buffer.

A practical method to set the indemnity period

Work backwards from a “worst credible” scenario.

For example:

• 1–2 months: loss adjuster visit, scope of works, approvals

• 1–2 months: contractor availability and lead times

• 2–6 months: repairs (longer if structural)

• 1–3 months: re-letting period (marketing, referencing, fit-out)

For many standard residential lets, 12 months is often a sensible baseline. For commercial property, listed buildings, specialist fit-outs, or multi-occupied premises, 18–24 months can be more realistic.

What insurers will ask for after a loss of rent claim

To calculate the claim, insurers (or loss adjusters) commonly request evidence such as:

• Tenancy agreements/leases

• Rent schedule and rent ledger

• Bank statements showing rent receipts

• Management accounts (for commercial portfolios)

• Evidence the property is uninhabitable (survey reports)

• Repair timeline and contractor documents

• Proof of mitigation steps (see below)

The more organised your records, the quicker the claim tends to move.

Mitigation: your duty to reduce the loss

Most policies require you to take reasonable steps to minimise the loss. In practice, that can include:

• Making temporary repairs to prevent further damage

• Securing the property

• Using alternative accommodation solutions where possible

• Re-letting as soon as the property is fit for occupancy

If a property could have been made habitable sooner but wasn’t (for avoidable reasons), an insurer may challenge the length of the claim.

Common exclusions and limitations to watch

Policy wordings vary, but common limitations include:

• Loss of rent only applies following insured damage (not wear and tear)

• Exclusions for unoccupied property beyond a set period

• Exclusions for flood unless specifically included

• Exclusions for subsidence or movement (often restricted)

• Exclusions for infectious disease or government restrictions (wording-dependent)

• Caps on certain perils (e.g., escape of water limits)

Also check whether your policy covers:

• Alternative accommodation (often alongside loss of rent for residential landlords)

• Denial of access (e.g., nearby incident prevents access)

• Non-damage denial of access (less common, often limited)

Loss of rent vs business interruption (and why it matters)

For owner-occupied commercial property, the equivalent concept is usually business interruption (BI), which covers loss of gross profit or revenue.

For landlords, loss of rent is the “BI-style” cover for rental income.

If you own a building and also operate a business from it (e.g., a shop with a flat above), you may need both:

• Business interruption for trading income

• Loss of rent for any let portions

Practical tips to avoid underinsurance

Here are the biggest “easy wins” that prevent claim issues:

• Use the correct annual rent figure (don’t guess)

• Review rent annually at renewal

• Choose a realistic indemnity period (especially for commercial)

• Check if average applies to loss of rent

• Keep leases and rent schedules organised

• Understand unoccupancy conditions (and notify your broker/insurer)

Quick checklist: setting loss of rent correctly

Use this as a fast self-audit:

• What is the total annual rent across all units?

• Are any rent reviews due in the next 12 months?

• If the worst happens, how long would repairs realistically take?

• Would you struggle to re-let quickly (specialist premises, location, licensing)?

• Is the property listed, complex, or likely to face planning delays?

• Does the policy apply average to loss of rent?

FAQs

Is loss of rent the same as rent guarantee?

No. Loss of rent relates to insured damage making the property uninhabitable. Rent guarantee relates to tenant non-payment.

Does loss of rent cover void periods?

Usually not. If the property is empty because you can’t find a tenant, that’s not an insured loss.

What if only part of the building is damaged?

Often you can claim for the affected part only, but it depends on the wording and how rent is defined.

Do I need 12 months or 24 months indemnity?

If it’s a straightforward residential property, 12 months is commonly adequate. If it’s commercial, listed, has specialist fit-out, or could face contractor delays, 18–24 months may be safer.

Can insurers reduce my claim if I under-declare rent?

Yes—if the policy is subject to average, underinsurance can reduce the payout proportionately.

Final thoughts: protect cashflow, not just bricks and mortar

Buildings insurance fixes the physical damage. Loss of rent protects the cashflow that pays the mortgage, maintenance, and overheads.

If you want, tell me:

• Property type (residential/commercial/mixed)

• Total annual rent

• Any special features (listed, multi-let, specialist fit-out)

…and I’ll suggest a sensible indemnity period and the key wording points to ask your insurer/broker about.