Most every commercial lease contains a provision requiring both the tenant and the landlord to buy insurance. Typically, several forms of insurance are required, including Commercial General Liability, Physical Damage, Workers Compensation, and Business Interruption (rental loss for landlords). The most often negotiated components of the insurance provision regards the actual limits of liability and the amount of the deductibles. In recent years landlords have been requesting higher Bodily Injury, Property Damage Liability limits and Personal Injury Liability limits. This is in no small part to the litigious society we live in, and the ever rising costs to repair/rebuild buildings.
We are seeing landlords request up to $5,000,000 per occurrence in some leases, and that may be reasonable depending on the size of the transaction and the quality of the project involved. For smaller deals such limits may be unnecessary and an argument can be made to lower limits closer to the $1,000,000 – $2,000,000 range.
The inclusion of Business Interruption insurance and Earthquake insurance are also negotiable. In some instances these provisions can be negotiated out of the lease due to the broad language and/or high cost of this insurance.
Why is all of this important? Well, most leases also contain an indemnification and waiver whereby the Tenant releases the Landlord (and vice versa) from any liability from property damage or personal injury that occurs in the premises, subject to certain other provisions, including a waiver of subrogation.
What is a waiver of subrogation? The insurance required for property loss, damage by fire or other casualty generally includes a waiver of subrogation. This means that the policy has to have a special type of endorsement that prohibits the insurer from attempting to seek restitution from a third party who causes any kind of loss to the insured. Basically, the landlord and the tenant agree to look to their own insurance for reimbursement.
Some landlords carry earthquake insurance, some don’t, and some may change the type of insurance that they carry during the lease term. This can affect the amount of operating expenses passed through to tenants and an area that monetary recoveries can be made on behalf of tenants if their lease has been properly negotiated. To read more on how such items can affect operating expenses please see our base year blog, Auditing Your Base Year Lease Saves You Money!
One of the most important things a tenant can do when negotiating the insurance provision is to run it by their insurance carrier (and attorney), since they are the ones that have to comply the terms.