The face of small to medium-size business is changing mostly because of COVID but also because of the prior downturn in our economy. Many business owners and employees were working from home. With the increase in lay-offs, people were turning to entrepreneurship to take care of their families. Home-base businesses have become more common and vary.
As we are now in Phase II of re-opening some new businesses are looking at leasing commercial space. When you lease you sign a contract which may or not be reviewed by legal council and in some cases may not even be read.
Let me share some of the challenges you may face when signing that lease as it relates to your commercial insurance.
Landlords and property managers (lessors) are tasked with leasing the property to firms that will pay the rent, not damage the property or put the landlord and/or property manager in position where they might be liable for damage or injury to anything or anyone. As a result, they develop leases to protect themselves.
Incorporated in those leases are quite often clauses that not only ensure that they won’t be liable for the lessees’ negligent acts but also transfer liability that would normally be the lessor’s responsibility over to the lessee. Let’s talk about a couple of those clauses.
Waiver of Subrogation:
The principle of subrogation in insurance exists when an insurer has paid a loss under an insurance policy, they are then entitled to “step into the shoes” of the insured and recover against the third party who was actually at fault for the loss. This can serve to benefit both the lessor and the lessee if properly executed. However, it is important that the waiver be mutually beneficial and not be just to the benefit of one party.
It’s not uncommon to have a Waiver of Subrogation on the property section of the policy however, one should be extremely cautious when it comes to the liability section. In some cases, the Waiver serves to waive the right of the lessee to subrogate even when the lessor is totally responsible for the loss.
Another common request of the lessor is to request that they be Additional Insured on the Liability section of the policy. It is normal that the endorsement will limit the coverage for the Additional Insured to losses “arising out of the operations of the named insured”.
Beware of the lease that requires the lessee to be added as Additional Insured on the lessee’s property coverage. In order to be named as Additional Insured, the lessor must have some financial interest in the property which is usually not the case.
The other thing that can cause confusion is tenants improvements. Particularly now when people go bankrupt and leave everything behind. If the lessor can find a similar business to move in the landlord may want the insured to pay the insurance on the original Tenant’s Improvements but that does not mean the tenant owns them. That Improvement can be bought off the previous owner or the landlord can keep them and charge a fee for the use and make the lessee responsible for insuring them as well as doing the maintenance etc. etc.
Ensure that you review the lease with both your legal council and your broker prior to signing the lease!