May 28th, 2014, By Don Catalano
No matter how many expenses your landlord takes care of for you under your lease, or bundles into your common area maintenance charges, at least one additional item is unavoidable. A tenant liability policy is a fundamental part of your business liability insurance and serves to protect both you and your landlord, especially if your lease transfers liability to you.
If you have a fire in your space and it destroys the building, who is responsible? Just as you would hold your landlord responsible if a fire in the building damaged your space, many landlords also include a tenant liability policy in their lease terms that makes you liable for what you do to their building. Under a tenant liability policy, if you didn’t carry your own property insurance, your landlord or his insurer would hold you responsible for the damages.
Tenants can frequently insure themselves against liability for their spaces as a part of their commercial general liability policy. This is why lease terms requiring tenants to carry CGL policies are common. Typically, the lease will specify the amount of the policy: $1 million per occurrence and $2 or $4 million aggregate is common for a small tenant. It requires that that the landlord be named as an additional insured. This gives your landlord access to protection in the event that if something happens in your space, it generates liability for him.
When choosing an insurance policy, you would be well-served to ensure that you have comprehensive-enough coverage to protect against any damage to the building or your space. In addition, since many tenant agreements contain lease terms allowing the landlord to periodically audit the tenants’ insurance records, you should also contact your agent to ensure that you are properly naming your landlord. Not following this requirement could be a breach of your obligations under the lease, and could even give your landlord an excuse to evict you from the building.
Another solution to the problem of being held liable for the building beyond your space is to ensure that your lease terms include getting a waiver of subrogation from the landlord’s insurer. This legal clause prevents the landlord’s insurer from coming after you for losses in the greater building. While it might not be necessary if you have your own insurance coverage, it does stop the insurer from coming after you if you are a tenant that pays a pro-rata share of the landlord’s general insurance policy as a part of your gross rent or CAM charges. Bear in mind, though, that a waiver of subrogation won’t protect you in your space. It just limits your exposure to the landlord’s insurance company.
Insurance requirements and the lease terms that accompany them can be very complicated. If you have questions that go beyond business points, you might choose to discuss them with an insurance agent or an attorney. However, Benjamin Franklin’s principle that an ounce of prevention is worth a pound of cure holds true in this instance. Carrying ample tenant insurance can protect you against your customers, your vendors, your landlord and his insurance company.