Leasing 101: Insurance
Tenant should anticipate that the lease will require it to maintain general liability and property casualty insurance during the term.
This provision is as much for tenant’s benefit as it is for landlord’s.
Insurance provisions are technical, use and location specific, and often subject to changes that the insurance industry regularly makes to the types of insurance that are ordinarily available.
That said, there are a few broad comments that can be made regarding insurance. The rest should be discussed with an experienced lawyer when the actual lease is being negotiated.
Those few broad comments are:
1. Bring Your Insurance Carrier into the Process.
This often is overlooked, but your insurance agent should be brought into the lease process early.
The best way to handle this is to cut and paste the insurance section of the lease right into an email to your agent.
Having the agent review the terms and provide feedback will help you know what conflicts there are between your policy and the requirements of the lease.
Handling this early will avoid any last-minute problems before you are ready to sign.
2. Certificate of Insurance.
A tenant should be prepared to provide a certificate of insurance to landlord prior to tenant’s taking possession of the leased premises.
3. Loan Restrictions.
A landlord’s attorney might claim that it is restricted from changing the insurance provisions due to covenants under their loan agreements.
However, when pushed, the landlord’s risk manager usually will find room to compromise.
It is critical to negotiate this early in the process. If the insurance is left to the end of the negotiation, tenant may not have enough time or leverage to modify the provisions.
4. Waiver of Subrogation.
The parties should insert a mutual waiver of subrogation with respect to property casualty.
An experience lawyer can explain the reasoning and details, but the prospective tenant should be aware of this and should raise it with its lawyer.
5. Don't Pay Insurance Costs Twice.
A tenant should raise two specific items with its attorney and risk manager and have them discuss these with their landlord counterparts:
(a) who is insuring the improvements within the leased premises, and
(b) should tenant obtain business interruption insurance.
Sometimes the landlord will obtain these types of insurance, and tenant might be paying for them through the common area maintenance charge.
Not only would it be a waste of money for both landlord and tenant to obtain this insurance, but it could lead to complication if two insurance companies are insuring for the same thing.
The insurance section should be negotiated early in the lease process, and the negotiation should include the risk managers of landlord and tenant.
If landlord and tenant leave the insurance negotiation only to their lawyers, they might end up with an insurance section that appears legally sound but is practically useless.
If insurance is left to the last open issue in a lease, the looming deadline pressures could lead to an unnecessarily difficult negotiation.