When a landlord and tenant enter into a commercial lease for a retail store or office space, the lease will likely contain a long insurance provision as well as an indemnity provision. An indemnity is a promise whereby one party promises to indemnify (or compensate) the other against some anticipated loss.
The commercial lease insurance provision will state the types of insurance the landlord must carry on the building, such as casualty insurance for damage caused by fire, hazards or terrorism and liability insurance to cover damage to property, bodily injury or death. By contrast, the tenant will be required to obtain and pay for insurance covering casualty or liability occurring within the leased premises and coverage for the certain events that occur in common areas of the leased building, especially if due to the tenant’s negligence.
The tenant is the named insured – that is the party paying for the insurance whose credit was reviewed when issuing the policy and determining the premiums. The landlord will request certain types of insurance in certain amounts be on a “per occurrence” basis with permitted deductible amounts. Landlords will sometimes request a tenant to carry business interruption insurance. The rationale behind this request is if an event occurs that interrupts tenant’s business, the tenant may lose revenue and then not have sufficient funds to pay the rent.
Why Is the Tenant Being Asked to Add Others to Its Insurance Policy for Casualty and Liability?
On most casualty policies (with the exception of business insurance), the landlord will ask to be named as an “additional insured” on the tenant’s casualty policy, together with other interested parties such as the landlord’s agents (e.g. the property management company, or the mortgage lender).
An “additional insured” is a person or entity other than the named insured who is protected under the terms of the insurance policy sometimes referred to as the “loss payee. “ Typically an endorsement to the policy is added to cover additional insureds. Landlords feel this protection is like “a belt and suspenders.”
The landlord will sometimes request a full copy of the tenant’s insurance coverage, with an endorsement showing the additional insureds listed, but more commonly will request a “Certificate of Insurance” which is a one-page sheet showing the types of coverage, amounts and deductibles and the lists the parties covered as additional insureds.
The Bottom Line
Both the tenant and landlord should have their attorney carefully review the insurance provisions of the lease and indemnity clause to determine that there is adequate protection for each party and reasonable coverage given the specific risks.