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!
We have all seen the commercial about the Twix candy bar and the competition between Right Twix and Left Twix.
Both factories are identical and produce the right and left halves of a single product. Yet, there is a sinister difference between the two. In order to save money on Insurance, Right Twix only insures for one half the value that Left Twix does. That’s right, Left Twix insures for 100% of Replacement Cost Value and pays twice the premium that Right Twix does.
Right Twix has determined that with all of the safeguards in place it is very unlikely the whole factory will burn down. Maybe half of it at the most.
It turns out their estimate was correct because when the fire started in one facility and eventually spread to the other, the fire was brought under control with only partial damage to both Right and Left Twix.
Right Twix called their Insurance company to file a claim fully expecting they would pay for all of the damage. Left Twix did the same.
Since Right Twix only insured for half their value and paid half the premium that Left Twix did, does it seem fair to you that Right Twix should receive the same benefit as Left Twix, who paid twice the premium for twice the amount of insurance?
It isn’t fair at all, not to all the business owners who pay their full share of premium or to the insurance companies who collect the premiums of the many to pay the losses of the few.
For this reason, Fire Insurance policies usually contains a premium levelling mechanism referred to as the Co-Insurance Clause. The Insurance Broker for Left Twix took the time to explain this important condition. For a Replacement Cost Policy, Coinsurance is usually set at 90% of the Replacement Value. Failure to do so will result in a penalty if there is a claim, and the following is an example of how it works;
The Twix factories both had Replacement values of $1,000,000.00. The minimum amount required by the Coinsurance Clause is therefore $900,000.00. It is of course best to insure for 100% of Replacement Value, but that is another story.
The formula is best explained as Did, divided by Should, multiplied by the amount of the damage to the factory. In this case each factory had $250,000 in damage.
That means that Right Twix was paid;
DID. SHOULD. DAMAGE. SETTLEMENT
$500,000 \ $900,000 X $250,000 = $138,000 and became a Co-Insurer for the difference of $112,000.00
Left Twix promptly received the full settlement of their claim and was soon back in operation.
Right Twix needed to obtain additional financing to rebuild causing delays in resuming operations and went eventually went out of business leaving Left Twix making both halves of the chocolate bar.
The moral of this story is that the right Insurance Broker will tell you what you need to know, not just what you want to hear, or;
You can’t expect to get both halves of the Twix if you only pay for one.
Nobody wants to be over insured so the question to ask is how much is enough? This a question that a qualified insurance broker is well equipped to help you find an answer to.
For property insurance the answer is fairly simple. What is the replacement cost value of your property? Take that figure and allow a percentage for increases over the policy term. Many insurance policies already include that provision. Does yours?
What is your appetite for risk? This question goes to the amount of deductible that you should carry. This is one of the best ways to reduce premiums. If you wouldn’t submit a small claim, why pay a premium based on low deductibles?
For business owners the place of work is important to income and any damage can result in an interruption in the revenue stream. Time becomes of the essence in restoring damaged property so the business may continue producing revenue. The expression “time is money” is never so graphically proven as when a business owner is struggling to carry on operations in the midst of property restoration. Your broker can assist you in selecting the correct form of Business Interruption Insurance, and more importantly, the correct amount to make you whole again.
Selecting an appropriate amount of Business Liability Insurance used to be an objective process based on the value of the asset needing protection from lawsuits. Our society has changed and with it the complexity of legal tangles an individual or business owner needs to manage. Your broker can assist you in identifying these exposures and how to mitigate many of them as the first step in financing the risk with the correct form of liability insurance. It is a process that should and does take some time but consider it well spent.
As for the amount, liberal courts are awarding higher damages these days, so select an amount that represents the value of your asset and add a piece of mind factor. The most-costly part of any business liability policy is in the first $1,000,000 of the limit; excess insurance beyond that is relatively inexpensive.
The short answer?Engage in best practices, self insure as much as you can afford, and buy high limits to cover the catastrophic loss that will put you out of business.
As your insurance broker, I’ll be there to advise and guide you through this process.