The following items should be addressed with each lease draft or renewal. For further insight, see ICA’s Lease Analysis and Expense Recapture Consulting Service or view ICA’s Articles.
Leases and Immunity
Many leases grant immunity to subrogation or exchange of immunities in event of fire and allied perils. But why stop there? Try to obtain immunity/exchange immunities against any casualty. Of course, you must also make sure the insurance language in the casualty policies permits such exchange.
Concessionaries, Lessees, Etc.
A lease was executed requiring the Tenant to provide insurance to the Landlord. The Tenant moved into the premises and now claims that he cannot obtain the insurance. The Landlord therefore finds himself in the position that he must attempt to obtain the insurance.
In view of this situation, we suggest that if you lease any premises to a Tenant or permit a Concessionaire to use part of your premises, the Tenant should be required to furnish you with any insurance that you demand prior to allowing them to enter your premises.
Hidden Factors in a Net Lease
A net lease, like a sleeping dog, sometimes unexpectedly bites you in an unexpected anatomical place. Recently, a boiler cracked on the premises of one of our Clients, a Tenant. The Client did not maintain “off premises” boiler coverage since the lease made no mention of protecting against damage to boiler. What the lease did say, however, was that the Tenant (Client) was responsible for all expenses such as rent, taxes, insurance, repairs, etc. (Equivalent to a net lease). The boiler was not only expensive to repair, but considerable damage to the building ensued. The Tenant was required to contribute toward the total loss cost.
The moral is this : Whether a particular exposure (such as boiler) is mentioned in a lease by name or not, if you are a Tenant under a “net” lease, you should demand that the Landlord insure the exposure for your mutual benefit.
Hold Harmless Agreements
Nice Alliteration....Hold Harmless....But does it always work? Certainly a clever invention whereby one party takes another party off the “liability” hook. Suppose the Hold Harmless Agreement is for “Liability” vs. Hold Harmless for “Loss”. If held harmless for “Liability”, the other party pays all costs as incurred. If held harmless for “Loss” then you may have to wait for reimbursement until you have actually paid a claim and incurred out-of-pocket loss. What a difference!
Incidentally, in all Hold Harmless Agreements, be certain that the other party pays all defense costs in addition to Liability!
See our Insurance Contract, Lease and Indemnification Language Analysis Consulting Service.
Liability - Landlord & Tenant
Being named as an Additional Insured in an insurance policy purchased by the other party in a Landlord/Tenant relationship may not always operate in your best interest. If the policy covers direct damage such as fire, the policy should be written so that the interest of the Landlord is not joint but several. In that event, the defenses available to the insurance carrier when attempting to deny coverage would not be available against you, the Tenant. That is your interest.
Likewise, if the policy involves third party liability, the liability policy should be written with the interests where the liability is several, and in addition, should be primary insurance as respects any liability policy you may have purchased in your own name.
Lease and Boiler Insurance
A Client signed a lease as a Tenant requiring him to carry boiler insurance. The Tenant then sought boiler insurance, but could obtain only limited coverage instead of broad coverage for the following reasons:
1. The boiler was over twenty years old.
2. There was no regular fireman.
In view of this situation, before signing a lease the lease should state the type of boiler insurance required and the limit. The coverage for Boiler & Machinery should be as broad as the Property form, because a Boiler & Machinery policy insures many machinery, equipment and unique exposures not covered under the Property policy.
Fire - "Increase in Hazard"
This situation occurs myriad times. An insured closes the automatic sprinkler system for repairs and someone forgets to re-activate it....Big fire...No sprinkler.
Standard terminology in policy forms permits denial of liability by the insurance company based on “increase in hazard”. Is the insurance company correct? In one instance, the insured in this uncomfortable scenario argued against denial of loss by countering this basis of denial by arguing that shutting a sprinkler system is not an “increase in hazard,” but merely a “ reduction in protection”.
Nice twist! Of course it won’t work if the policy also has a protective safeguard warranty.
Special Agreements - Landlord & Tenant
A Client rented space from a Landlord and enjoyed years in a peaceful Landlord/Tenant relationship. A loss occurred and the Landlord agreed to reconstruct the Tenant’s building facade at a great expense. After the loss, a new agreement was signed between the Landlord and our Client without our input within which was a clause which provided that if any claims that the Tenant had against the Landlord resulting from any loss, the Tenant agreed to release the Landlord from liability. Unfortunately, we discovered that the Tenant had forgotten a water damage loss to the building which had occurred prior to this new agreement for which Tenant’s insurance company had paid the claim. When Tenant’s insurer sought subrogation recovery from Landlord’s insurer and commenced suit, this new contract was relied upon to deny subrogation. Thus, the Tenant’s insurance company will hold the Tenant, not the Landlord, responsible for this loss.
When you have occasion to sign new agreements, if you must surrender any claims that you may have against the Landlord or any other party, you must always consider whether an insurance company may be involved.
In standard fashion, a lease granted our client, a Tenant, a Hold Harmless Agreement for negligence arising from Landlord’s activities in common areas. But, this Tenant did not demand that the Hold Harmless also cover the Landlord’s contractors. Generally, a Tenant does not have to be concerned with work done by a Landlord. Suppose an accident should occur to an employee of a contractor and suit is brought against you, the Tenant. Relief from liability should be obtained through the Landlord’s Hold Harmless Agreement.
It is not often that we encounter Leasehold Insurance coverage. We have typically recommended that where a Tenant has a valuable leasehold, they should consider carrying insurance for the difference between the rent paid for the period of the lease and the rent they would have to pay if they had to lease the premises on the open market.
But then a new situation arose...A Tenant leased a corner store for fair market value. Over time, the Tenant’s business increased considerably. Then a fire occurred and as a result the lease was terminated by virtue of the fire clause. The Tenant thus lost this profitable location, along with the nice profit they could have expected over the many years at that location remaining on that lease. Therefore, whenever Leasehold Insurance is considered, consideration should not only be given to the favorable rental, but also to the loss of profits over the unexpired period of the lease. Extended Period of Indemnity Coverage can replace the lost profit for only a specific time period, not the entire period remaining in a lease. Due consideration should be given to these topics to assure the best coverage is tailored to protect against such potentialities.
Will the real Insured please stand up?
Will the real Named Insured please stand up?
Will the real Additional Insured please rise?
Will the real Additional Named Insured please stand up?
Gadzooks... they all sound the same.... But are they? NO!! Check your rights before you assume you are adequately protected!
The language of a Lease can mystify and confuse even the most astute risk manager. Recently, a Landlord’s lease was reviewed which required the Landlord to absolutely rebuild the premises in event of fire or casualty loss on behalf of its Tenants. The Landlord sought to protect himself with ample property replacement insurance; without co-insurance; with a minor deductible.
To his horror, however, the Landlord discovered that local ordinance also absolutely prohibited reconstruction of this non-conforming use property (a small shopping center nestled among affluent one family dwellings). What to do?
The owner turned to the risk advisor for insurance help. ALAS, THERE IS NO COVERAGE AVAILABLE. MORAL: Clients must be taught that not all (bad) Lease conditions are insurable. Consultation with the risk management advisor before signing a Lease might have revealed the existence of this uninsurable situation.
Abatement of Rent
You are a Shopping Center owner with Gross Lease Tenants. One of these Leases provides that there shall be rent abatement for a Tenant if 50% or more of the entire Center is destroyed by casualty loss. (Presumably the rent abatement prevails even in the absence of direct physical loss to a specified tenant, who may be at another unaffected end of the Shopping Center). The Landlord carries standard rent reimbursement coverage.
Query : If the rent for a particular tenant is abated even in the absence of direct physical damage to the Tenant’s premises, would the policy pay a claim for Landlord’s loss of rent as dictated by terms of the Lease? You should obtain clarification in your policy.