Tenant Trouble

Is your business moving?  If you plan to lease from a landlord, you need to be aware of the risks associated with your lease.  Our job is to review the risk of loss provisions of leases from a tenant’s standpoint.  You may have more liability than you think!

Landlords have less of a problem with defective leases because they control their own insurance program (and if not, they should!) because they buy their own insurance on the building that they lease out. On the other hand, tenants pay for the landlord’s insurance through charge backs. However, they do not have the benefit of the insurance,  they are actually in the position of being sued by the landlord’s insurance carrier or the landlord itself if they were negligent directly or indirectly in damaging the landlord’s building. Furthermore, even if they did not do anything to cause the damage, they have agreed to repair or rebuild under the repair provision of the lease.

A claim by the landlord’s insurance company or by the landlord for reimbursement for losses incurred can arise out of:

1.   Ordinary or gross negligence of the tenant, the tenant’s employees, agents or invitees, even where there is no lease agreement.

2.   Repair clauses in leases that impose the responsibility for repairing building damage, even where the tenant was not negligent.

The standard commercial general liability policy provides only $100,000 in coverage for damage to a landlord’s premises, and this is limited to fire only. Even then, coverage applies only if the damage was as a result of the tenant’s negligence.

Exclusion of the commercial general liability policy. Under most repair clauses, the tenant has to pay for repairs even when no negligence is involved.

Higher limits can be purchased by tenants under the commercial general liability insurance, and some carriers will add additional perils, but few carriers will cover contractually assumed damage.

For a first class office space, assuming a repair cost of $200 per square foot, a $250,000 limit would only cover an office with 1,250 square feet. A 10,000 square foot office will have a repair cost in the area of $2,000,000. For a manufacturing building at $100 per square foot, a $250,000 limit would cover a 2,500 square foot leased building.

The first method of solving this problem is to utilize the tenant’s legal liability coverage form and attach it to a Special Cause of Loss form giving you all-risk coverage. This covers the tenant’s legal liability. However, legal liability assumed in a contract or agreement by way of repair clauses is an important exception. For example, if there is lightning damage to the premises, it is unlikely that the lightning would be caused by the legal liability of the tenant. Under a repair clause of a lease, the tenant likely will be assuming that liability unless there is an exception for repairs arising out of fire or casualty losses. Even under the tenant’s legal liability coverage form, this would not be covered because the Special Cause of Loss form excludes contractually assumed liability.

The other method is to purchase full building coverage on the building although this can be expensive. Whereas the tenant legal liability form is typically 25% of the building rate, you are going to being paying 100% of the rate only to cover the insurable interest of the tenant if you purchase full building coverage.

The most important thing you can do is to allow us to have input on lease agreements, either new agreements or renewals, before they are signed. In our review of literally hundreds of lease agreements, we have found very few that do not have defective waivers of subrogation or repair clauses.


For any of your personal or commercial insurance needs, please contact us.

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