Commercial Real Estate Lease Insurance Provisions: A Primer

Insurance and Subrogation and Indemnification, oh my. While not as scary as lions and tigers and bears, the insurance provision in a commercial lease is a difficult “animal” to comprehend. The following presents a non-exhaustive summary of the pieces often found in the “insurance provision puzzle”.
(a) Coverage. If the insurance provision in a lease form you are presented with requires the tenant to procure “fire and extended insurance coverage”, you have an old lease form, or, are dealing with a party who is unaware that commercial lease insurance has evolved over the years. The “Cadillac of commercial property insurance” these days (and the insurance that 99.9% of landlords will require) is the “special causes of loss form (CP 10 30)” which provides what is referred to as “all risks coverage” (coverage for loss from any cause except those that are specifically excluded). The other two Insurance Services Office (“ISO”) causes of loss forms are the “basic causes of loss form”, and the “broad causes of loss form”. These forms provide what is referred to as “named perils coverage” (coverage for loss from only the particular causes that are listed in the policy as covered).
The above-named policies can cover physical damage and destruction to the landlord’s building and fixtures, as well as tenant improvements and personal property therein. As a general rule, tenants leasing an entire building will be responsible to procure property insurance for landlord’s building, as well as tenant’s personal property therein. In a multi-tenant situation, landlords typically procure the building insurance (and charge same back to tenants in a net lease) with tenants being responsible to insure their personal property. Commercial lease tenants are also typically required to provide some or all of the following insurance products:
1)                  public liability insurance (including insurance against contractual or assumed liability of the tenant under the lease) providing coverage against bodily injury to or death of persons, and damage to property (One Million to Three Million is typical); 
2)                  workers' compensation insurance covering all employees in the premises and/or all persons employed in connection with any work performed by the tenant in the premises; 
3)                  business interruption or loss of income insurance in an amount equal to the fixed rent payable under the lease for a certain number of months;
4)                  plate glass insurance; and
5)                  any insurance policies designated necessary by the landlord with regard to any tenant build-out of the premises including "all risk" builders' risk insurance.
Landlords are typically required to maintain special form (all risks) insurance for the building in amount not less than 80% of replacement value, and comprehensive general liability insurance in the range of One Million to Three Million, depending on the size/nature of the property. In some landlord form leases, however, a requirement for landlord’s insurance is often nowhere to be found. While a landlord of a multi-tenant facility would be crazy not to insure, without detailing the coverage in the lease, tenants might be unpleasantly surprised to learn (after the fact) that the landlord has a high deductible (for example, with a $25,000 “deductible”, the building is essentially non-insured for the first 25K of any claim), or low coverage limits. Tenants in a multi-tenant facility should always require the landlord to maintain adequate insurance coverage, and detail same in the lease.
(b)        Mutual Waivers of Claims/Mutual Waivers of Subrogation. If insurance coverage issues boggle the mind, the issues presented with other parts of the “commercial lease insurance puzzle” (and their interplay) can send one over the edge. These provisions, when drafted correctly are mutually beneficial to the landlord and the tenant. Accordingly, it makes sense to understand them. We will just cover the basics, here, as there are entire seminars and publications dedicated to commercial lease insurance.
The basic theory is simple enough. Typically, the landlord and tenant insure their own property; often for the full replacement value. Based on fundamental fairness, if, for example the landlord receives insurance proceeds due to fire damage to its building caused by the negligence of the tenant, there should be no need for the landlord to sue the tenant, since the landlord has been compensated. Reverse the roles, and the same holds true. Accordingly, the insurance provision should contain such a mutual waiver whereby landlord and tenant waive claims they have/will have against each other (regardless of fault) if they are compensated by insurance.
A problem arises, however if the mutual waiver only involves landlord and tenant, and not their respective insurance companies. Basically, insurance companies that pay off claims, like to try and get their money back. The insurance contract’s “right of subrogation” (if not waived) would allow the insurance company to step in the shoes of the landlord in the above example, and sue the tenant to get back the money it paid on the landlord’s claim (even if landlord waived its right to sue the tenant).
The way to combat this anomaly is to provide for a mutual waiver of subrogation in the lease (in addition to the mutual waiver between landlord and tenant). In such a provision, both parties will agree to procure a special type of endorsement on a property-casualty insurance policy, aptly named a “Waiver of Subrogation”. The Waiver of Subrogation prohibits the insurer from attempting to seek restitution from a party who causes any kind of loss to the insured.
Further issues to consider regarding waivers of subrogation are: 1) Will the waiver apply to the extent of insurance proceeds received, to losses the lease requires to be covered by insurance, or to all losses; and 2) Will the waiver apply to liability insurance policies, as well as property insurance policies. If not, the parties should require that they be named as an additional insured on each other’s liability insurance policy.
(c) Indemnifications. Most landlords (and attorneys representing landlords) believe in landlords and tenants waiving claims against each other, based upon the principles of fundamental fairness and today’s reliance on insurance to compensate for losses. However, when a third party is injured, for example, and sues the landlord, allocation of risk and defense costs seem to take precedence over fairness. In a typical lease indemnity clause, a party agrees to pay the liability, and in some cases the defense costs and damages, of the other party if a claim is asserted by a third party. Tenants should insist the indemnification be subject to the waiver provisions, to avoid the landlord receiving a “double recovery”. Tenants should also not be bashful in seeking indemnification from the landlord, at least with regard to landlord’s operation of any common areas.
                        One of the greatest challenges in lease negotiation, especially with regard to insurance provisions is to understand and respect the interplay of insurance coverage, waiver and indemnification issues, and to maintain internal consistency within these provisions. Landlords and tenants should not hesitate to consult with their brokers, insurance agents and attorneys when reviewing commercial leases, especially with regard to the often overlooked but always important insurance provisions.

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