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Know your Limits
Insurance Limits on commercial property Leases

By Warren W. Stumpf

Warren W. Stumpf began his insurance career with Allendale Mutual Insurance Company in Short Hills,  NJ. In 1982 Warren moved to Harrisburg to work for a large insurance agency that concentrated on commercial insurance. He received his certified insurance councelor designation (CIC) in 1989. Later, Warren opened Capital Region Insurance Agency Inc., which specializes in commercial insurance programs and personal lines. Capital Region Insurance respresents Erie Insurance Group, Millers Capital Insurance Co., Reamstown Mutual, Foremost Insurance Co., Technology Insurance Co., and Progressive Insurance Co. They are licensed in PA, MD, WV, VA, NC, IN and DE. Warren can be reached at 717-731-1142 or warren@criainc.com.

Contained within all commercial property leases is a section of requirements pertaining to insurance. Not all leases request the same insurance terms and conditions. It is extremely important before signing any commercial property lease agreement to review the articles of insurance requirements with your insurance agent. This article reviews the lease requirements within the contract from the tenant’s (lessee’s) prospective.

In today’s everchanging litigious environment the landlord (lessor) and the tenant (lessee) must make every effort to protect themselves adequately from general liability claims (bodily injury and property damage). The required limits requested within a commercial property lease may not be sufficient for your actual liability exposure.

A typical insurance requirement within a lease contract requires three items: general liability, listing owner of property as additional insured, and waiver of subrogation. General liability is carried to provide coverage for injury to or death of a person or persons and damage to property arising from the use and occupancy of the premises. Listing a lessor as an additional insured affords the owner coverage under your policy but only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to you and shown on your policy.

A waiver of subrogation in favor of the lessor restricts the lessee’s insurance carrier in their ability to recovery for injury or damage from the lessor due to the lessor’s negligence when a third party is injured or when damages to a third party’s property has occurred. Additional insured and waiver of subrogation must be approved by the insurance carriers underwriting department, then added by endorsement and charged for accordingly.

One example of the insurance liability requirement within a standard commercial lease contract is for the lessee to obtain premises comprehensive general liability insurance with a $1,000,000 combined single limit for bodily injury and property damage, and a $2,000,000 aggregate naming the property owner and their respective affiliates as additional insureds. However, while these limits may protect the lessor and affiliates up to their desired limits, each lessee has his or her own unique exposures and obligations and the limits requested within the lease may not be adequate for those. We currently have a situation with an insured medical facility who is a lessee within a corporate structure. After a careful review of our insured’s commercial property lease contract, we had suggested higher limits than was requested. Fortunately for the insured they heeded our advice and purchased the higher limits before the following situation unfolded. An elderly patient was visiting the medical facility and tripped and fell inside the premises, breaking their arm and knee. Tragically, the injured person died due to complications during surgery. The deceased person’s estate is now suing the medical facility for bodily injury and pain and suffering. If our insured had purchased only the limits originally requested in the lease agreement, and if they were then found negligent, it would be very likely that those limits would have proven inadequate to cover defense cost and final settlement.

Within the general liability limits of insurance there is a coverage provided to the lessee that gets little attention but is very critical if a fire or building damage occurs and the lessee is held liable. Each insurance carrier handles this coverage differently. You may have heard this coverage called “Fire Legal Liability,” but the correct name is “Damage to Premises Rented to You” because it now covers much more than fire. For instance, if your carrier is affording you a $50,000 limit and you are leasing space in a $500,000 building, you are not adequately protected and need to review this underinsured issue with your insurance agent. One example of this “damage to premises rented to you” coverage being triggered is if you leave your premises at the end of the day and neglect to extinguish a candle that then causes a fire to that portion of the building; you could be held responsible for the loss. Due to the vast differences in the way companies handle this coverage, we urge you to explore this coverage with your agent in its entirety.

The general liability policy also affords a coverage called medical expense. The medical expense is strictly for third party invitees who are injured while on your premises and are paid as “good faith” to prevent being sued, regardless of fault. Keep in mind that the medical expense limit is for third party persons only. The standard general liability form provides a limit of $5,000. By endorsement, this can be increased for an additional premium. This coverage is not for your employees or yourself. To cover your employees and yourself you need to purchase a workers compensation policy for work related accidents or disease and a group health insurance policy for medical insurance.

This article has discussed the basic components of a standard commercial property lease contract. Every lease is different and uses its own unique wording to accommodate each party’s needs. A lease agreement protects the building owner’s interest in their investment. But by no means do the insurance requirements within the contract provide the proper insurance protection for the lessee’s business. We always recommend providing a copy of all insurance requirements within a lease to your insurance agent for an extensive review before signing to ensure that all of your insurance needs and exposures are being properly protected.

 
 
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