Does your company lease an office, retail space, warehouse or another type of premises to conduct its operations? If the answer is yes, your lease probably requires you to cover your landlord as an additional insured under your firm's general liability policy. Additional insured requirements are a standard feature in commercial leases .
Why Your Landlord Demands Coverage
When a property owner leases all or a portion of a building to a tenant, the owner bears a risk that the tenant might inadvertently cause an accident that injures someone visiting the property. The injured party might seek compensation by suing both the tenant and the landlord for damages.
Landlords are vulnerable to lawsuits because plaintiffs often assume they have "deep pockets."
For example, suppose you operate an accounting business in office space you lease from Prime Properties, the building owner. A customer of yours could be injured on your premises if say, he slips and falls on a loose piece of carpet. The customer might sue Prime Properties, claiming the landlord is liable for his injury because it failed to properly maintain the building.
Prime Properties knows that such claims could occur. To protect itself, it has included an additional insured provision in your lease. The clause requires you to purchase a general liability policy that lists Prime Properties as an additional insured.
Additional Insured Coverage
Covering a landlord under a tenant's liability policy usually requires an endorsement. While endorsements used to cover landlords vary, most contain a schedule that lists the name of the landlord and describes the premises leased to the tenant. The landlord's name should be the same as it appears in the lease. That is, if the landlord is listed as Smith Properties Inc. on the lease it should not appear as Bill Smith on the endorsement. Likewise, the property address in the endorsement should match the one on the lease.
If the endorsement misstates the landlord's name or contains the wrong property address, your insurer might refuse to cover a claim against the landlord.
Most additional insured endorsements for landlords afford scheduled coverage only. That is, they limit coverage to the landlord listed in the endorsement. The landlord is typically covered only for its liability for the ownership, maintenance or use of the premises (or part thereof) leased to you and described in the endorsement.
Some liability policies provide additional insured status to lessors of premises (landlords) automatically when such coverage is required by a contract. Lessors of premises may be included under the heading Who is an Insured or added via a "broadening" endorsement.
Automatic additional insured coverage has several advantages. First, it eliminates the need to list landlords individually on the policy. All landlords that meet the description in the policy are automatically covered. Secondly, coverage for landlords is already factored into your policy premium. If you rent an additional property during the policy period and the owner demands liability coverage, the landlord should be covered for no additional charge.
Many of the endorsements used to cover landlords as additional insureds contain restrictions that are easy to overlook. For instance, the standard ISO endorsement excludes claims arising out of new construction, demolition or structural alterations performed by the landlord on the leased premises. This means that if Prime Properties hires a contractor to refurbish your premises, Prime cannot rely on your liability policy to cover claims arising out of the construction operations.
The ISO endorsement also states that it will not afford broader coverage or higher limits than you are obligated to provide under the contract. If the lease requires less coverage for the landlord than is provided by the policy, the contract terms will apply. For example, suppose your lease requires you to insure your landlord at a limit of $500,000. If a $750,000 claim is filed against the landlord and your policy provides a $1 million limit, your insurer will not pay more than $500,000, the limit required by the contract.
Many commercial leases contain requirements regarding liability insurance. Typically, a landlord will require you to purchase a specific limit (such as $1 million per occurrence) of general liability insurance and to cover the landlord as an additional insured. The lease may specify certain coverages your policy must include. Your agent or broker can help you determine whether the required coverages are included in your policy.
Some leases contain conditions that are difficult to satisfy. An example is a requirement that your insurer notify your landlord 30 days in advance if your policy is canceled. Some insurers will agree to send cancellation notices to additional insureds but many will not.
If your insurer cannot comply with specific lease provision, ask your landlord for a compromise. For instance, it may agree to accept a cancellation notice from you rather than your insurer.
Commercial leases are written by lawyers, not insurance professionals. Consequently, their insurance requirements may contain inaccurate terminology. For instance, a lease may refer to physical injury to a person's body as personal injury. In liability policies, physical injury is called bodily injury while personal injury means intentional torts like libel and slander. Leases may also use outdated terms like comprehensive general liability or broad form property damage liability . These terms have been irrelevant for decades but they still appear in property leases.