Post written by: Tony Vicari
Typically, when a company (or individual) rents partial space or the entire building from the owners of the building, they may be required to provide fire liability coverage or even broader liability coverage for the value of the section they occupy or the full value of the building. This is why it is important to carefully review all written lease agreements to truly understand what liability the tenant is assuming.
Where can the tenant find the proper insurance to cover this contractually assumed liability?
Two possible options are: 1) a Commercial General Liability Coverage Form, or 2) a Property-Legal Liability Coverage Form.
One of the main coverages provided by the standard Commercial General Liability Coverage Form is damage to premises rented to you, better known as fire damage legal liability.
What is this coverage and why is it needed?
Fire damage legal liability protects a tenant who is legally obligated, typically through a lease agreement, against loss to the property they are leasing for fire damage.
A common form currently used in the insurance industry is ISO Form CG0001 (04 13) to provide this liability coverage. In its unmodified state, it provides $100,000 of fire damage legal liability coverage. This provides coverage only for fire-related losses. The base liability limit can usually be increased and many companies have various expanded coverage forms that will increase this limit to $500,000, or more.
If a lease requires broader coverage than just fire, a different form would be needed.
A broader form with higher limits is the ISO Legal Liability Coverage Form CP0040. This can be written under the tenant’s property coverage for real or personal property.
Remember, the tenant would have to be considered legally liable for either coverage to apply. For example, if lightning were to strike the building and a fire ensued, the tenant would normally not be considered legally liable for an act of God.
The above example should not be confused with another common situation where a closely aligned owner or group of owners leases a building back to the main business for tax or other reasons. In this scenario, the primary source of coverage can be property insurance and that coverage can be as broad as desired. Normally, an attorney creates wording to hold each party harmless for their acts and includes a waiver of subrogation clause and Additional Insured wording. This simplifies the loss settlement process and eliminates the need for additional insurance. If a loss occurs, the property coverage is the reimbursement source and no liability issues need to be addressed.
In summary, the value of the building coverage required of the tenant may be dictated in the lease, or it may be as vague as the value that the tenant occupies. If it is not specific, the tenant’s independent insurance agency should help determine the amount and type of coverage. Remember, if the lease only requires the value of the area occupied by the tenant be covered, such as in the case of a multi- tenant building, the value to be insured would be limited to only that portion. The remainder of the building would potentially be covered under General Liability as property damage, as long as the remainder of the building is not leased and not in the tenants care, custody, or control.