Insurance Provisions on Commercial Leases

Filed under: Real Estate Law

Commercial lease negotiations can be time-consuming and complex, but you can count on one thing being true: Both the tenant and the landlord want to get the best possible deal. Therefore, each provision within the lease must be carefully examined for its potential impact on each party’s bottom line.

Insurance provisions within the lease spell out each party’s obligations and responsibilities regarding protections of the building and contents, and even various liabilities. These provisions are of critical importance. Both parties can avoid many future headaches by understanding them in advance.

With that mind, consider these six questions when reviewing insurance provisions:

Who is responsible for what? Which party is responsible for insuring the building itself? What about its contents? Are there limitations on contents? What about specialized business equipment?

What types of insurance are required? The tenant should seek to understand the types of insurance required by the lease, as failure to comply can create problems later. Not only can failure to maintain proper insurance result in significant financial burden in the event of a loss; it can also provide the landlord with cause to terminate the lease.

At the same time, it is important for the tenant to understand the landlord’s insurance requirements as well. Each party should consider naming one another as “additional insured” on policies.

Who carries the burden of liability? The potential for lawsuits on the property should be examined carefully. Whose insurance policy is responsible for which areas of the building? Who is responsible for maintenance of the parking lot or common lobby, and claims arising from incidents within those spaces? Typically, tenants are only held responsible for the area they occupy, but this should be spelled out clearly within the lease.

What about coverage for leasehold improvements? Sometimes, tenants make the mistake of purchasing coverage for their business equipment, but forget about leasehold improvements they made to the building such as interior walls, carpeting, and so on. In the event of a fire or flood, leasehold improvements might not be covered under the landlord’s insurance, nor the tenant’s personal property policy.

Does the lease waive carriers’ rights of subrogation? Subrogation allows one party’s insurance carrier to sue the other party for reimbursement in the event of a loss. If tenant and landlord agree to a mutual waiver of carriers’ rights of subrogation, this means insurance companies cannot seek repayment from the other party.

Is there an abatement policy? In the event that the building is condemned or uninhabitable, will required lease payments be ceased? Tenants should investigate this issue, as the presence or absence of an abatement policy will impact the amount of business interruption insurance needed.

The above are just some of the more common insurance questions a potential tenant should investigate before signing a commercial lease. For more information on commercial leases and insurance provisions, contact our real estate attorneys prior to signing a lease. We can help tenants understand their rights and responsibilities, along with the potential impacts of each requirement within the lease.

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