Liability Coverage for Damage to Rented Premises
Virtually all general liability policies include a coverage called Damage To Premises Rented To You. This coverage is automatically provided under Coverage A, Bodily Injury and Property Damage Liability. As its name suggests, it covers claims against an insured tenant for damage he or she has caused to premises rented from a landlord.
What are Premises?
To comprehend Damage To Premises Rented To You coverage, you must understand the meaning of the word premises. In legal parlance, premises means land and any buildings or structures that are attached to the land. Leased premises may be a building or a portion thereof. Many small businesses rent one section of a building rather than the entire structure. Whether you rent an entire building or only a portion of it, the physical address of your rental property should be listed in the declarations portion of your liability policy.
Two Coverages in One
Damage To Premises Rented To You coverage can be confusing because it is provided by exceptions to certain exclusions found under Coverage A. In addition, it actually consists of two separate coverages:
- Coverage for claims or suits that arise from fire damage to rented premises
- Coverage for claims or suits that arise from damage by any cause other than fire, to premises or their contents rented for seven or fewer days
Each of these coverages is explained below.
1. Fire Damage to Rented Premises
Claims or suits that arise from fire damage to rented premises are covered by an exception to most (but not all) of the exclusions listed under Coverage A. This exception usually appears at the end of the Coverage A exclusions. It affords coverage for claims or suits arising out of property damage by fire to premises rented to you or occupied by you without a lease with the owner's permission. Only fire damage to premises is covered. Here is an example of the type of claim this coverage is intended to address.
Ted Thompson owns Thompson's Machining, a machine shop that makes metal parts for farm implements. Ted's business operates out of a building he rents in an industrial part of Pleasantville. His business is insured for liability under a standard general liability policy.
Late one afternoon, an employee of Ted's is using a welding torch to repair a damaged metal part. Unbeknownst to the worker, a spark from the welding torch has flown into a nearby trash can. The trash has begun to smolder, but no one in the shop notices the smoke.
Ted's employees leave for the day, and Ted locks up the shop. Two hours later, the trash ignites. The fire spreads to the floor and one wall of the shop. By the time the fire is extinguished an hour later, the building has sustained $75,000 in fire damage. Ted subsequently receives a demand from his landlord to pay the cost of repairing the building. Fortunately for Ted, the loss should be covered under the machine shop's general liability policy.
Covers Legal Liability Only
The fire damage coverage that is provided under Damage To Premises Rented To You applies only if you are legally liable for the damage. That is, the fire damage to your rented (or occupied) premises must have been caused by your negligence.
In the Thompson's Machining scenario described above, Thompson's Machining is liable for the fire damage to the rented premises because the fire was caused by an employee's negligence. The employee should have known that a welding torch can produce sparks, and he failed to prevent a spark from entering the trash can.
Damage To Premises Rented To You does not cover damage that is not your fault. For example, suppose that you have rented office space in a building under a five-year lease. Late one night, a violent thunderstorm breaks out. Lightning strikes the building and causes a fire in your office space. Lightning is considered an act of God, for which you are not legally liable. Thus, your policy will not cover any demand against you to pay for the fire damage.
No Contractual Liability Coverage
The exception that affords Damage To Premises Rented To You coverage does not apply to the contractual liability exclusion under Bodily Injury and Property Damage Liability. This exclusion still applies. Thus, no coverage is provided for liability you assume under a lease to indemnify the landlord for fire damage to the rented premises. That is, if you are obligated to pay for fire damage to a building solely because of a contract you signed (and not because of your legal liability), your liability policy will not cover any claim that results.
For example, suppose you rent a building. You sign a lease in which you assume liability for any fire damage that occurs to the building during the term of your lease (whether or not the fire results from your negligence). Faulty wiring in the building causes a fire that damages the structure. You may be contractually obligated to repair the damage under the lease. However, the cost of the repairs will not be covered under your liability policy because you are not legally liable for the fire.
Excess Coverage Only
The fire damage coverage described above is not intended to be a substitute for commercial property insurance. It applies on an excess basis over any available fire insurance on the property. This means that if the damaged building is insured under a property policy, your liability insurer will pay a claim after the property insurance has been used up. Your landlord (or you, if required by your lease) should insure the building against physical damage by purchasing a commercial property policy.
2. Short-term Rentals
The second coverage included in Damage To Premises Rented To You is afforded by exceptions to three exclusions found under the heading Damage to Property. These exclusions are listed below.
- Property damage to property you own rent or occupy
- Property damage to property loaned to you
- Property damage to personal to property in your care, custody or control
These exclusions do not apply to property damage by a peril other than fire to a building (or its contents) you have rented for a period of seven or fewer days.
Because of the exception to the exclusions cited above, a liability policy covers claims or suits arising out of property damage to premises you rent for a week or less. Damage to property contained in the building is also covered. Coverage applies only if you are legally liable for the damage. The policy won't cover payments you make to the property owner voluntarily. The exception to the three exclusions applies to damage from a cause other than fire.
Here are two examples of claims that would probably be covered via the short-term coverage described above.
You arrange an off-site training session for your employees at an office complex located near your business. The training takes place in a conference room you have rented for three consecutive days. During the training session, an employee tosses a stapler to another employee. Unfortunately, his aim is bad, and the stapler hits a large mirror. The mirror shatters. No one is hurt but the office complex later demands that you replace the broken mirror.
The damage occurred to the contents of property that you rented for seven days or less. The damage resulted from a peril other than fire. Your firm is legally liable for the damage because it resulted from your employee's negligence. As the claim falls within the exceptions to the exclusions listed above, it will likely be covered by your firm's liability policy.
Your company manufactures ink cartridges for desktop printers. You are on a three-day business trip to visit potential clients and have brought samples of your ink. It is the last day of your trip and you are in your hotel room. You are packing your samples into your briefcase when a faulty cartridge explodes. Red ink sprays all over the ceiling, walls, carpet and bedspread.
You apologize to the hotel for the ink fiasco. Nevertheless, you receive a letter from the hotel manager demanding payment for the cost to remove the ink from your hotel room and its contents. The damage occurred to property you rented for seven or fewer days, and it resulted from a cause other than fire. You are legally liable for the damage since it resulted from your faulty product. The claim should be covered by your liability policy.
Suppose that you rent a hotel conference room for a few days for a business meeting. During the meeting, you are using a lighter in a demonstration when you accidentally start a fire. The fire damages furniture in the conference room, and the hotel sues you for $25,000. Will the claim be covered by your liability policy?
The answer is no. The seven-day coverage described above applies to contents of rented premises only if the damage is not caused by fire. The policy covers fire damage to rented premises, but fire damage to other types of property is not covered.
Both parts of Damage To Premises Rented To You coverage are subject to a special limit listed in the declarations. This limit may be $100,000 or more. It is smaller than the Each Occurrence limit.
When choosing a limit for Damage To Premises Rented To You, you should consider the amount for which you could be held liable if a building you rent is damaged by a fire (or another peril if you rent premises for seven days or less). Will the limit on your liability policy be enough to cover a claim? If you don't know the answer, ask your insurance agent or broker for assistance.