Commercial Leasing: Insurance for Landlords
Insurance is an important tool allowing landlords and tenants to allocate risk in a commercial lease. Here are some recommendations:
- Your Team. The lawyer and the insurance advisor work together to review and advise on the insurance clauses in the commercial lease. The goal is to ensure that the tenant’s insurance and landlord’s insurance work together to ensure no coverage gaps, avoid over-insuring and protect all parties in a commercially reasonable way. The insurance advisor can advise on insurance products available to meet these goals, and the lawyer drafts the language to legally obligate the parties to obtain the insurance needed to implement the plan.
- Certificates of Insurance. The commercial lease will include a clause which gives the landlord the right to require that the tenant provide copies of certificates of insurance confirming that the tenant has acquired all insurance required by the lease. This provides the landlord with the opportunity to check that all insurance required to implement the plan has been obtained, and includes all the endorsements and requirements set out in the lease. Further, failure to provide certificates of insurance can be a warning sign of problems pending for a tenant, as a tenant facing financial difficulties may not be able to provide the certificate on time. Landlords can use the annual requirement to provide certificates of insurance to keep an eye on tenant compliance.
- Waiver of Subrogation. Normally, the insurer insures the loss and pays out for the loss suffered by the person who bought the insurance (and any additional insureds). After paying out, the insurer has the right to “subrogate” or “step into the shoes” of the insured and sue in court the person who caused the loss to recover the damages. For example, the landlord is insured and suffers a loss caused by the negligence of a tenant. Insurance pays out, and then the insurer sues the tenant in the name of the landlord to recover the loss.
Waiver of subrogation means that for any person named in the waiver, any loss caused by that person will be paid out by the insurer but the insurer will not sue that person. So, if in the above example the landlord had waived subrogation in favor of the tenant, then the insurer would pay out the loss but not sue to recover from the tenant.
The insurance strategy of both the landlord and the tenant waiving subrogation allows for simplification of risk allocation clauses in the lease, by requiring each party to look to their own insurance to cover the loss without worrying about who caused the damage. This also allows the simplification of other risk allocation clauses in the lease.
- Special Negotiated Terms. Sometimes tenants will negotiate special insurance rights. For example, a government tenant may wish to self-insure or a large corporate chain may negotiate provisions relating to an umbrella insurance policy for multiple locations. When landlords are considering special insurance provisions, consider also how those special insurance provisions will be managed if that tenant later requests an assignment of the lease. The landlord should consider adding language to the commercial lease limiting those special terms to the original tenant.
If you have a standard form commercial lease which you would like to have reviewed for risk allocation recommendations, or if you are looking to develop a new standard form lease, give me a call.
Andrea East is a business lawyer at Pushor Mitchell LLP practicing in the areas of Business Law and Commercial Leasing. You can reach Andrea at 250-869-1245 if you would like assistance.