Commercial insurance and the impact that commercial leases could have on your business’s insurance.
If you are a business owner who rents their current location, it may be in your best interest to review your lease agreement for any insurance related clauses that you or your broker may need to be aware of. Commercial building owners will have different clauses in their lease agreements and some of those clauses will greatly affect how you need to be insuring your business. We take great pride in making sure our insureds are well informed and our hope with this article is to shed some light on things to watch for in your commercial lease regarding insurance.
Responsibility
Every lease agreement is different and that is why it is important to read the agreement in its entirety and ideally have a lawyer read over the agreement as well. A lease agreement will commonly stipulate that the landlord is responsible for insuring the building and the tenant is responsible for insuring their own property, but this isn’t always the case. Imagine you lease a building where you are the sole tenant, it is possible that your lease agreement may specify that you are also responsible for insuring the entire building. If that is the case, the tenant may wish to check the amount of insurance on their own policy to avoid a shortfall in their insurance coverage limits. Though it may not be common, this has happened in the past to many tenants.
Another lease may have a clause in it that would make the tenant responsible for the landlord’s loss of rental income from other units in the same building. This could occur if other units must be vacated for repairs resulting from damage caused by the tenant’s negligence (for example: an avoidable fire started in your unit). The clause would require that you or your insurance would have to pay for the loss of the landlord’s income from the units that had to be repaired due to a loss caused from your unit/negligence.
Liability
Another important aspect of commercial lease agreements is who is responsible for liability coverage and what areas of the building they responsible for. In most tenant agreements, the tenant is responsible for the actual space they occupy in the building. If someone slips and falls in the area occupied by the tenant, the lease will be looked at to confirm who is responsible for the liability and that party’s insurance policy will have to respond. If as the tenant you are responsible for snow clearing or lot maintenance, it is crucial to know how the liability is defined in the lease agreement in the case of any slips or falls.
Exterior Glass
Having exterior glass clauses in commercial rental lease agreements is quite common. The glass (windows) at the front of a store could be costly to repair, and they are often the responsibility of the tenants to replace them if damaged. This can be a shock to a lot of business owners and an expense that must be either budgeted for or appropriate insurance coverage obtained in order to cover the loss.
Mechanical Breakdowns
Some lease agreements may also specify that the tenant is responsible for the mechanical breakdown of rooftop heating and air conditioning systems that service their unit. This could be a costly repair and if the tenant is not aware of this responsibility, they most likely would not have the adequate coverages added to their insurance policy to cover these types of breakdowns. In order to avoid costly repairs, it is important to know exactly what you are responsible for as a tenant in the building you are leasing from.
Subrogation
Subrogation is a fancy term that describes the insurance company’s right to pursue reimbursement of payments from the responsible party that caused the loss. Having a clear tenant agreement that outlines who is responsible for insuring each portion of the building in the event of a loss is important. Having a mutual waiver of subrogation will protect the tenant from being blamed by the building owner’s insurance carrier and having that insurance carrier try to obtain the money they lost from you and your insurance carrier. If there is not a mutual waiver of subrogation, the building owner’s insurance carrier could sue your insurance policy for the cost of the entire building.
As you can see above, the world of commercial lease agreements can be a bit muddy. It is highly suggested that you obtain a lawyer that is well versed in these types of contracts, but one that is also aware of the insurance implications of the clauses within them. Every business owner knows how important insuring their business, employees, and livelihood is, but it’s possible you either don’t have enough insurance or you were not aware of the impact that these clauses in your rental agreement could have.