Liability Coverage for Damage to Rented Premises
Damage Is Covered Only If You Are Legally Liable For It
Many small companies lease their business premises from a landlord. If the business accidentally causes a fire that damages the building, the landlord or its property insurer might sue the business for the cost of the repairs. Fortunately, most businesses are insured against such suits under a coverage called Damage To Premises Rented To You. This coverage is automatically included in the standard general liability policy.
Two Coverages in One
Damage To Premises Rented To You coverage can be confusing because it is provided by exceptions to certain property damage exclusions found in a liability policy under Coverage A, Bodily Injury or Property Damage Liability. The coverage is comprised of two parts:
- 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
Within the context of real estate, the word premises means land and any attached buildings or structures. Leased premises may be a building or a portion thereof.
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.
Coverage For Fire Damage to Rented Premises
The standard liability policy covers claims or suits that arise from fire damage to rented premises via an exception to most (but not all) of the exclusions listed under Coverage A. Coverage is provided 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. Here is an example of a covered claim.
Vince owns Vital Vittles, a restaurant he operates in space he leases in a shopping center. Vital Vittles is insured for liability under a standard general liability policy.
One day, a Vital Vittles employee is cooking meat on a grill when he accidentally starts a fire. The worker sprays the flames with a fire extinguisher but is unable to keep them from spreading. Vince phones the fire department and a fire truck soon arrives. By the time the blaze is extinguished, the restaurant's premises has sustained $75,000 in property damage.
A few weeks after the fire Vince receives a demand from his landlord, Primo Properties, for the cost to repair the building ($75,000). The claim should be covered under Vital Vittles' general liability policy.
Covers Legal Liability Only
The coverage for fire damage to rented premises is available only if you are legally liable for the damage. That is, the property damage must result from your firm's negligence. In the Vital Vittles scenario described above, the restaurant is liable for the fire damage to the building because the fire was caused by the negligence of a restaurant employee.
The coverage afforded for fire damage to rented premises does not apply if the fire was caused by an act of God or other peril that did not result from your negligence.
No Contractual Liability Coverage
As noted above, fire damage to rented premises is covered via an exception to most of the exclusions listed under Coverage A. One exclusion not eliminated is the contractual liability exclusion. Because this exclusion remains, no coverage is provided for an obligation 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 that Vince (in the previous scenario) has signed a lease in which he's promised to reimburse the landlord for any fire damage to the leased premises that occurs during the term of his lease. Late one night a faulty electrical outlet, which the landlord has failed to fix, triggers a fire in the restaurant that causes $25,000 in damage to the building. Vince may be contractually obligated to pay for the damage but his liability policy won't cover the loss.
Fire damage legal liability coverage will pay for a loss after any fire insurance you have purchased on the property has been used up. It is not a substitute for a commercial property policy.
Coverage For Short-term Rentals
The second coverage included in Damage To Premises Rented To You is afforded by an exception to three exclusions listed under the heading Damage to Property. These exclusions (listed below) do not apply to property damage by any peril other than fire to a building (or its contents) you have rented for a period of seven or fewer days.
- 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
The second half of Damage To Premises Rented To You coverage applies to claims arising out of property damage to premises (or their contents) you rent for a week or less if the damage is caused by a peril other than fire. Coverage applies only if you are legally liable for the damage. The following examples demonstrate the types of claims this short-term coverage is designed to address.
TipTop Toys manufactures games and toys for children and adults. The company rents a ballroom in a high-end hotel for a two-day conference. During the conference, an employee is demonstrating a new product, a miniature drone, when the device malfunctions. The drone flies around the ballroom erratically and eventually crashes into a sprinkler head. Water pours out of the broken head, causing $30,000 in damage to a wood floor. The hotel demands that TipTop pay for the damage.
The claim has arisen out of property damage by a peril other than fire to premises that TipTop rented for seven or fewer days. The claim should be covered by TipTop's general liability policy under Damage To Premises Rented To You coverage.
If you rent a building (or part thereof) for a week or less and accidentally cause a fire that damages the building's contents, your liability policy won't cover the loss. Fire damage to contents isn't covered.
Pete is a salesperson for Primo Paints, a paint manufacturer. He has driven to a distant city and is in a hotel room preparing for a meeting with a new client. The client is interested in Primo's new line of wood stains packaged in spray cans so Pete had some samples shipped to the hotel. Pete is checking his samples to make sure all have arrived when a can suddenly explodes. The can sprays wood stain all over the hotel room. Pete isn't hurt but the hotel room is a mess.
The hotel subsequently sends Primo Paints a demand for $25,000, the cost to repaint the room and replace the damaged furnishings. The claim has resulted from damage by a peril other than fire to rented premises and its contents. Because Primo Paints has rented the premises for seven days or less, the loss should be covered by its general liability policy.
Damage To Premises Rented To You coverage is subject to a separate limit listed in the declarations. A typical limit is $100,000. When deciding what limit to purchase, consider the types of premises you rent and the amount for which you could be held liable if you damage the property accidentally.