In my experience, I have learned not to be surprised with a landlord’s answer to two questions: 1. whether it has evidence of insurance from the tenant and 2. whether it is consistent with the insurance terms in the lease. Too often, the answer to both questions is “No”. This applies to individual landlords, closely-held private landlords and even, on occasion, publicly-held landlords.
We take out insurance on our properties, on our cars, on our lives, and to protect our ability to earn a living in our occupation. It follows that tenants should carry insurance to protect their property and ability to carry on business to meet their lease obligations and to protect others in the event of 3rd party liability claims.
Typical commercial leases provide for various types of insurance to be taken out and paid for by the tenant, coverage amount minimums, parties to be covered, and occasionally, certain riders or endorsements depending on the facts.
Below are 5 points that every commercial landlord (and lender) needs to consider at a minimum when dealing with tenant insurance. (Keep in mind that I am not an insurance expert and I welcome comments from those in insurance /risk management fields).
1. What Insurance Coverage: At minimum a tenant should be required to take out:
a. “all-risks” insurance on its property, signage and improvements on an “all-risks” rather than on a “comprehensive” basis. The former covers losses from all perils other than those expressly excluded. The latter only covers those perils expressly stated and no other;
b. boiler and machinery insurance for repair and replacement of the boilers, electrical and HVAC equipment etc. that it owns or operates in the premises;
c. business interruption insurance which reimburses the tenant for direct or indirect loss of earnings and business expenses from perils insured against. For example, if a fire occurs in a mall that prevents the tenant from carrying on its business for 90 days, this insurance assists a tenant in meeting its on-going third-party expenses in addition to its rent so that the effects of the loss are lessened;
d. public liability and property damage insurance for:
i. personal injury liability – injury other than bodily injury such as: false arrest or detention, malicious prosecution, wrongful entry or eviction;
ii. bodily injury liability – injuries caused to other individuals in the event of a motor vehicle accident;
iii. tenant legal liability – liability imposed by law (common law, statute law) to pay for harm done to others;
iv. contractual liability – liability assumed by a contract either written or implied and if a breach occurs there is damages to the other party and that can affect business operations.
2. What Amounts: Property insurance should be for the “full replacement cost” of the property or at least 90% of such cost. Liability insurance used to be commonly $2 million per occurrence but is now commonly seen with limits of not less than $5 million or more depending ion the circumstances including property use. There should be a provision to increase those amounts as the landlord or its mortgagee may require from time to time.
3. Who Should be Covered: The tenant is the primary “named insured” and the landlord is typically an additional insured as discussed below. However, there are other parties that need to be considered with respect to insurance coverage including lenders, the landlord’s directors, officers, employees and agents and beneficial owners of the landlord. There is a 2006 Ontario case – Nadvornianski v. Stewart Title Guaranty Co. 2006 CanLII 21787 (ON S.C.)- that suggests that where there are beneficial owners, the insurer may need to know this otherwise a claim by the trustee – who may have no “insurable interest” – could be denied leaving the beneficial owners without coverage.
4. How Should They be Covered – Additional Insured v. Additional Named Insured: Usually landlords and other 3rd parties should be shown as “additional insureds” on the liability policies as it carries less obligations and usually greater coverage. The “named insured” is typically the tenant. Being a “named insured” carries with it obligations that some landlords don’t want such as being liable for repaying the deductible [not the premium] to the insurer and being bound by representations made to the insurer by the tenant. Additional policy exclusions may also apply.
The primary “named insured” does get important rights: [a] it can authorize policy changes, including cancellation; and [b] it receives notices of cancellation and non-renewal and [c] the coverage will apply to its directors, officers and employees as well. This is not something that flows to an additional insured unless it gets written confirmation from the insurer.
5. Evidence of Insurance – Certificates v. Binders v. the Policy: Leases often accept evidence of insurance by way of certificates of insurance (“COI”) which summarize some of the insurance terms. However, COIs often contain disclaimers like “this certificate is issued as a matter of information only and confers no rights upon the certificate holder”. It acts as a notice to the holder that tenant has insurance but if the certificate holder is an additional insured, the policy must be endorsed accordingly so you need that policy and endorsement.
A step up from COIs are “binders” which are issued as temporary evidence of insurance until the actual policy is issued and usually does not include the COI disclaimers and requires the insurer to mail a notice of cancellation to the binder holder. Treat them like an offer to lease with terms still to be negotiated so there are risks in relying on them. The risk can be seen from a case that arose from the 2001 World Trade Center tragedy. Only one of the two-dozen insurers involved had issued a final policy to the building owners prior to the tragedy and that led to litigation over what other terms would have appeared in the other polices if negotiated and issued. At stake was an additional $3.5 billion which the property owners did not recover in that decision.
Obviously, the best evidence is the actual full policy itself with all endorsements.
The Lessons: 1. Lenders, landlords, developers, and others who obtain a COI should be wary and obtain a certified copy of the complete policy with all endorsements, and exclusions instead. 2. Carefully review the policy to ensure that the correct insurance with requisite limits was obtained, that the proper parties are listed as additional insureds, and that no exclusions in the policy vitiate the needed coverage. This can be costly and time-consuming so the policy should be obtained well in advance of the commencement/possession date and should be passed along to an experienced insurance/risk assessment advisor. 3. Review your lease forms and modify them where needed to require a complete copy of all insurance policies. 4. Make sure that you receive evidence on an annual basis that the policy remains in effect without amendment. Remember that it is usually much more cost effective to be proactive rather than reactive.
Disclaimer: This article is for general information purposes only and not intended as or to be relied upon for legal advice. Consult with a lawyer for your unique situation.
[*If there is a general real estate or leasing related question you would like to see addressed in a future article in “The Legal Corner”, please contact me directly by e-mail at [email protected] with your suggestion. Not all requests can be accommodated.]