Kenneth T. Calegari
Calegari Law Corporation
The insurance clause in a lease works to adjust risk between the lessor and lessee as the parties negotiate. The key is for the parties to understand the meaning of this clause, and hopefully avoid any gaps in coverage, which could increase costs or expose the parties to litigation.
The lease should spell out which party is responsible for obtaining insurance, what the minimum required types and levels of insurance are, what the maximum deductibles are, and hopefully who is required to be covered under the policies. This clause can also require specific language in the policies, state timelines for notifying the other party of pending claims/actions, and more. Regardless of who pays for or obtains insurance, property and liability insurance will be needed at a minimum. General property insurance will cover the property and building in the event of a loss. Liability insurance will cover the parties from third party claims, such as slip and fall accidents.
In addition to the basic property and liability policies, the parties will benefit from including language in the lease that addresses loss of rental income, lessee improvements, and waivers of subrogation. The lease should specifically state that the lessee is required to pay rent if the building is damaged or destroyed. The lessee can then choose to insure this specific situation in order to minimize their risk. Similarly, the lease should state which party is required to insure and replace lessee improvements. These can be covered by insurance, so the party bearing the risk of their loss should verify coverage with their broker. A mutual waiver of subrogation can benefit both parties in the lease. This prevents the lessee’s insurer from seeking reimbursement from the lessor if the lessor is responsible for some or all of a loss paid on the lessee’s policy, and vice versa.
Additional coverages that a lease may address are boiler and machinery coverage, which usually relates to the heating and air conditioning system and plate glass coverage. The lessor is often in the best position to insure these items, especially in the case of a standard commercial or industrial lease with multiple lessees in a single building. If the plate glass is to be covered by the lessee, it will need a special endorsement to ensure coverage.
A Few More Thoughts
While the lease may place all the burden of obtaining the insurance on one or the other party, both parties should seek a comprehensive review from their insurance broker in order to insure against items not outlined in the lease. A lessor should never assume they have transferred all of their risk to the lessee and therefore have no need for insurance of their own. For example, if the lessor is required to insure the building against loss from fire or other casualty, it also likely has the ability to cancel the lease if the building is lost. If that occurs, the lessee will want leasehold interest insurance to cover an increase in rent at a new location, and/or the costs associated with relocating.
Some leases require the lessee to obtain insurance and list the lessor as an additional insured. This is often not sufficient to protect the lessor from exposure. Instead, the lessor may wish instead to be a named insured. Similarly, a certificate of insurance, while a helpful way to determine if adequate limits are carried on an annual basis, is only a snapshot at a specific point in time. It doesn’t alter the insurance policy, require notice to the party obtaining the certificate of cancellation, or ensure continued coverage.
Kenneth Calegari is the founder and President of Calegari Law Corporation, a San Diego law firm providing comprehensive legal representation in the areas of construction, real estate, and litigation. Mr. Calegari provides a “full service” approach to clients, which stems from Mr. Calegari’s extensive experience in business, construction, real estate and the practice of law. Clients benefit from realistic legal AND business advice in order to make the most informed decisions as to how to proceed. Please contact Kenneth Calegari at 858-304-1988, or email@example.com.
May 5, 2015 Article #8–Commercial and Industrial Leasing Series