“Insurance Obligations Of Tenants When Leasing A Commercial Property Rental” written by Mike Marko.
Worried that you may lose everything with regards to your commercial property rental?
Let’s face it… there is a certain leap of faith you need when you have a commercial property rental. You have to trust that the that the tenant will do what they need to do to protect the property.
But what if they don’t?
That’s what insurance is for.
But insurance can be expensive, and if the tenant has excessive claims then your insurance costs can skyrocket.
That’s why today I want to talk to you about having insurance obligations directed toward the tenant, and how to approach requiring the tenant to hold insurance to protect the commercial property rental.
Tenant’s Insurance Obligations In Leasing A Commercial Property Rental
When negotiating and signing commercial property leases it is important to make sure that the commercial business or tenant for your commercial building has all the required insurance to cover any loses that their business could incur.
Insurance or extra insurance for your commercial property is always better than not having any coverage for possible damages that could occur during the rental period. The best time to inform, require, and get notification that all insurance for the commercial business is in place for the commercial rental is prior to renting the commercial rental space.
It’s a common part of most commercial leases to require your commercial tenant to hold insurance during their rental of the property. The most appropriate time to notify and negotiate this requirement with the commercial tenant is prior to signing of the commercial property lease agreement.
There are many types of insurance that could be used to cover the commercial buildings and the businesses that occupy them. Normally a requirement for insurance is secured by clauses to the commercial lease contract that have to be included and agreed to by the tenants and property managers. The key to finding the right insurance for your commercial property is understanding what is needed for the property and how to hold the correct party to the contract responsible for keeping insurance and using insurance to pay for any damages that could have occurred.
Before exploring and detailing the different types of commercial insurances available for the commercial building let’s first look at what clauses are needed to the rental contract and what these clauses do…
What Is The Insurance Clause
Every rental contract has clauses that detail or hold different parties to the contract responsible for requirements spelled out in the contract that will oversee the rental period. Every commercial rental lease or contract has a clause that sets the commitments of both property manager and tenant regarding the amount of insurance that they will carry.
Normally the commercial lease will require a clause that states that the commercial tenant will obtain one or all of the following types of insurances while renting the commercial property. The common types of insurances required are general liability, business interruption, all-risk property, and workers’ compensation insurance. Some insurance clauses in a commercial rental agreement state the specific amount of liability coverage along with the exact quality and form of insurance that the tenant and building must hold during the property rental…
Types Of Insurances Usually Required
Commercial leases vary in the types of insurances that they require tenants to have or maintain. Normally these types of insurance policies cover public liability and industrial special risk and we will look at and detail the benefits of these insurances in the next sections…
Public liability insurances normally covers the insured/tenant for any legal liability such as personal injury or property damage caused by the tenant themselves. There is no specific required amount in this type of insurance coverage. Normally the insurance coverage will depend on the nature and the usage of the premises. However, don’t be surprised if you see $20 million public liability clause in the commercial rental contract because this quite common in today’s market.
Industrial Special Risk
Unlike public liability, industrial special risk policies are a tailored insurance policy that commonly covers an insured for physical loss, destruction, or damage to physical property that belongs to the insured. Aside from that industrial special risk policies also cover significant loss caused by an interruption or interference, following damage of the insured assets that have been disclosed to the insurer.
Another type of industrial risk policy required in commercial leases is the requirement of the tenant to take out and hold workers compensation insurance. However, if the tenant is an employer then this obligation is already mandated according to Workers Compensation Act 1987. To cover the commercial rental and building, it is best to require the workers compensation policy or certificate of policy be produced for records at signing of the commercial lease contract…
Extending The Tenant’s Insurance Policy To The Landlord
When securing insurances for the commercial space and building the policyholder can detail all the properties and parties that the policy will cover if there is a loss. Often in commercial leases there is a clause that requires the tenant to extend insurance coverages to include building owners and landlords. In these types of contracts the tenants are not only the ones who will enjoy the benefits of insurance because their insurance can be also extended to the landlord.
Extending the tenant’s insurance policy to the landlord or property manager could be done by including the landlord as either a “named insured,” “interested party.” There is normally an additional cost to extend the insurance to additional parties but it shouldn’t be overly costly to meet this requirement.
Landlord Being Included As A “Named Insured”
The landlord or property manager of the commercial property rental can require in a clause that they are included as a “named insured”. By requiring this in the commercial lease they will receive and can give expiry/renewal or cancellation notices and can make a claim and enforce the policy directly against the insurer.
When you are listed as a “Named Insured” you as the property manager can expect to have the same obligations as the tenant. You’ll be eligible for the duty of disclosure and you’ll also be required to pay premiums. Prior to being “named insured” you should detail in the commercial lease clause the obligations of all parties and who is responsible for payment for these types of insurance policies. The tenant’s conduct could affect the claim’s payment. But in most cases, both tenant and property manager need to agree on how to exercise any rights under the policy.
Landlord Being An “Interested Party”
If the property manager is included as “interested party”, it means that the landlord or property manager is not a party to the insurance contract. However when a loss occurs they will have the ability to contact the insurance company and could be due reimbursement for damages occurred.
As the property manager, you will not receive or cannot give any insurance notices but you can make a claim under the policy.
Here are the instances where a property manager can make a claim under the policy
- If it is listed or named as a beneficiary in the policy
- Or referred to in the policy as someone to whom the benefit of the policy extends
Noting The Landlord’s “Interests”
If you’re the property manager or landlord and you’re enlisted as the “interest” or “noted”, you will not be entitled to make a claim under the policy. It just means what the insurer included you as someone else that has an interest in the subject matter of the insurance.
Common Insurance Requirements In A Lease
As the property manager of a commercial property rental, you are required to have a knowledge regarding the insurance of your tenant.
Let’s take a look at the common insurance requirements in a commercial rental lease.
Waiver Of Subrogation
Subrogation allows the insurer to refund the payment that is used to pay a claim by a negligent insured. The waiver of subrogation is often used as a clause against the landlord or property manager if the insurance determines that the damages or loss occurred due to their negligence.
However, this practice is less common at the present time for a number of reasons such as:
- the reluctance of a tenant’s insurer to amend its standard policy provisions
- the acceptance by most landlords to take responsibility for their own negligence
As a building owner or property manager it is best to hold your own insurances for the property in addition to what you require from the tenants in your commercial properties. This way when losses or damages do occur you have several options to fix these losses and you also have additional security and coverage if there is a subrogation claim filed against you or you commercial building…
The cross liability is needed if a claim is brought against an insured by another party that has an insured status under the same policy. It is advisable to include a cross liability clause in your lease to protect you and your tenant if ever a different policy is issued to each party.
If you’re a property manager and you’re enlisted as insured by your tenant’s policy you need to make sure to include a cross liability clause in your lease agreement. However, this instances are far less common today because tenants are now listing their landlord or the property manager as “interested party”.
Notice Of Cancellation
In some lease agreements, the property manager requires that their tenants to state on their insurance policy that a policy is cannot be changed without prior notice, or unless it was approved by them or the landlord. However don’t expect this to be approved especially if you’re only listed as “interested party”.
Increase In Premiums
As the property manager, you also need to protect yourself. Therefore it’s advisable to maintain your own insurance policies to cover issues such as
- damage to property
- personal injury
- loss of rent
- general public liability
Make sure to include provisions so if ever a tenant does anything on the land, and it results in your insurance premiums going up, that you are allowed to recover the increase from the tenant.
Here are some examples of uses which may result in higher insurance premiums
- storage or use of hazardous materials
- dangerous activities
- commercial kitchens
- other uses that increase the risk of fire in the premises
Final Thoughts On Insurance Obligations When Leasing A Commercial Property Rental
In this blog post we talked about having the tenant hold the insurance to protect the property. The end goal is to ensure the property is covered, and that your costs are minimal. We talked about how to ensure that the commercial property rental is properly protected.
In the end, make sure you review the insurance acquired. Because ultimately you are responsible to make sure the structure is protected.
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