Post written by: Ruth A. Knopf, JD,CPCU,CIC, ARM, AU
Why transfer risk to tenants?
According to AM Best, the line of insurance at highest risk for loss to a real estate owner is liability. As a landlord, you do not have total control over the condition of a tenant’s premises or how they operate their business. This exposes you to potential risk of property damage or liability from exposures presented by the tenant. Risk transfer is one helpful solution.
The theory behind risk transfer is to make the party most in control of a situation responsible for damage should a loss occur. The use of appropriate contracts and risk transfer tools helps protect your interest by managing unintended liability you may be assuming from others, and concurrently shifting liability back to the tenant. This can greatly reduce the involved risk.
As a landlord, you should take all the right steps in managing risk of loss, including:
- Maintain your property to reduce the chance of accident and injury to others.
- Post the maintenance plan and janitorial service schedule.
- Train your staff to quickly and efficiently remediate hazardous situations.
- Install protective features like sprinklers, fire extinguishers, backup lighting and alarms.
- Work with a qualified Independent Insurance Agent to adequately insure for potential losses.
You should, as a landlord, require tenants to have liability insurance, and add you as an additional insured. In result, you may:
- Avoid legal costs or liability for losses arising from your tenant’s use of leased space.
- Help to avoid the headaches of being involved in a lawsuit.
- Protect your policy from having to pay for the loss, or being a part of your future loss experience.
Put your mind at ease by employing risk transfer.
Bart W. Rahe, CPCU, Real Estate Sector Manager for Westfield Insurance Company tells us:
“It is typical on a liability loss for the claimant to include as many parties as possible when seeking to hold someone responsible for their injury or damages. We frequently see losses where a landlord is drawn into a claim when a third party suffered injury or damages at their tenants business or residence. Proper wording in lease contracts, and management of the Risk Transfer process has proven to be the most effective way for a property owner to protect themselves from this very real exposure to loss.”
Below are a few ways to begin building a risk transfer program:
- Include a requirement in the lease for tenants to carry liability insurance with a highly rated carrier and designate you as an additional insured. According to IRMI Additional Insured Book, requiring your tenants to include you as an additional insured on their commercial general liability policies, or renters policies, will provide a certain degree of protection where you would not generally be automatically included as an insured.
- If the above cannot be done, at least obtain a Certificate of Insurance or Coverage Confirmation from the company or agent writing the tenant’s policy.
- Require the amount of liability insurance and the limit of fire legal insurance, or property legal liability coverage to be sufficient to cover typical lawsuits, as well as the value of potential fire loss that would result in a total loss of tenant’s space. Your Independent Insurance Agent can help you determine adequate limits.
- Request notification of major changes or cancellation of the policy.
- Include Hold Harmless and waiver of subrogation in lease.
- Have contracts and risk transfer program reviewed by qualified legal counsel.
For more on risk transfer, visit The John Liner Letter.
Learn more about Westfield’s Signature Series Real Estate Program, designed specifically to meet the needs and exposures of commercial real estate owners.
Are you a landlord? Feel free to share your suggestions below.
Image Credit: Flickr Creative Commons, DVS