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.
No comments :
Post a Comment