Insurance requirements in commercial leases

A commercial lease usually requires the tenant to carry general liability insurance with the landlord as an additional insured, property insurance on the tenant's own contents and improvements, workers' compensation for employees, and sometimes business income, umbrella and liquor liability coverage. It also commonly includes a waiver of subrogation and an indemnity. These clauses are negotiable, and the time to read them is before you sign, not when the landlord's property manager asks for a certificate.

What the lease usually asks for

Every lease is written by the landlord's lawyer, so the insurance exhibit varies. The pattern is consistent, though:

• Commercial general liability. A stated limit per occurrence and aggregate, written on an occurrence form, covering the premises and the tenant's operations. Many leases ask for the aggregate to apply per location.
• Additional insured status. The landlord, often the property manager and the landlord's lender, must be named. The form typically requested is ISO CG 20 11 (Additional Insured, Managers or Lessors of Premises), which covers the landlord for liability arising from the tenant's use of the leased premises.
• Property insurance on the tenant's side. Coverage for tenant's contents, trade fixtures, and the improvements and betterments the tenant paid for, on a special-form basis at replacement cost (tenant improvements and betterments: who insures them).
• Business income. Some leases require it, which is a sensible protection since rent usually continues unless the lease abates it.
• Workers' compensation and employers' liability at statutory limits, with a waiver of subrogation sometimes required.
• Commercial auto, umbrella or excess liability if the lease allows vehicle traffic or the landlord wants limits above the primary policy (commercial umbrella insurance).
• Specialty items. Liquor liability for restaurants and bars, pollution coverage for auto repair or dry-cleaning, plate glass, and signage.
• Insurer quality. Carriers rated at least A- by AM Best, written as "A- VII" (AM Best ratings explained for business buyers).

A triple-net lease also makes the tenant reimburse the landlord for the building's property insurance premium as part of operating expenses. That is the landlord's policy, bought by the landlord, and it normally does not cover your property.

The insurance clause, line by line

The clause below is our own illustrative wording, not taken from a real lease and not a market standard, but it collects what a landlord's form typically asks for.

(1) Tenant shall maintain, at its expense, from the earlier of the Commencement Date or Tenant's entry onto the Premises: (2) commercial general liability insurance on an occurrence basis with limits not less than $1,000,000 per occurrence and $2,000,000 general aggregate, the aggregate applying to the Premises; (3) naming Landlord, its managing agent and Landlord's mortgagee as additional insureds, on a primary and non-contributory basis; (4) special form property insurance at full replacement cost on Tenant's personal property, trade fixtures and Tenant's improvements; (5) business income insurance covering at least twelve months; (6) workers' compensation as required by law. (7) Landlord and Tenant each waive claims against the other for property loss insured, or required to be insured, under this Lease, and shall obtain waiver of subrogation endorsements. (8) Insurers shall be rated A- VII or better by AM Best. (9) Tenant shall deliver certificates and the additional insured endorsements before entry and at each renewal. (10) If Tenant fails to maintain the insurance, Landlord may purchase it and charge the cost to Tenant as Additional Rent.

• (1) Start date. Coverage must begin when you get the keys for a build-out, not when rent starts. Contractors working for you need their own coverage, and many leases require it.
• (2) Occurrence form and per-premises aggregate. Most CGL policies are occurrence-based already (occurrence vs claims-made policies). A per-location aggregate endorsement keeps a claim at another store from eating this location's limit. If you have $1 million primary plus an umbrella, ask whether the landlord accepts the combination.
• (3) Additional insureds, primary and noncontributory. Each named party needs an endorsement or a blanket form that reaches it; a name on a certificate does nothing by itself (additional insured endorsements explained). "Primary and non-contributory" means your policy pays first and the landlord's does not share (primary and noncontributory wording in contracts).
• (4) Your property. Special form means open perils with listed exclusions. Replacement cost on improvements matters because the lease may oblige you to rebuild them (tenant improvements and betterments: who insures them).
• (5) Business income. Twelve months is a floor written by the landlord to protect rent. Size it to your real restoration time.
• (6) Workers' compensation. Required by state law once you have employees, with thresholds that vary by state.
• (7) Mutual waiver. "Required to be insured" is the sharp edge: if you skip a coverage the lease requires, you still waive the claim, and the loss is yours. Your property policy must allow the waiver (the standard ISO conditions in CP 00 90 do, if it is made in writing before the loss); see waiver of subrogation: what it is and when contracts require it.
• (8) Rating floor. Limits which carriers qualify (AM Best ratings explained for business buyers).
• (9) Proof. Ask your broker for the endorsements, not only the certificate.
• (10) Self-help. The landlord's replacement coverage will cost more and protect you less, and an unpaid charge billed as additional rent can become a rent default.

How your CGL fits a lease

Two quirks matter. The standard CGL excludes damage to property you rent or occupy, with an exception for fire. In the ISO form (CG 00 01 04 13), exclusions c. through n. do not apply to damage by fire to premises rented to you, and a separate Damage to Premises Rented to You limit applies. So the CGL covers your legal liability for a tenant-caused fire, up to that limit. It does not pay for water damage, a collapse you cause, or other damage to the space, which is why leases often ask for property coverage or a higher fire limit.

Second, the form's definition of "insured contract" includes a contract for a lease of premises, but it carves out the part of the lease that indemnifies a person for fire damage to premises rented to you. That means the lease's indemnity for, say, a customer's slip-and-fall is generally an insured contract and can be covered by your CGL's contractual liability coverage, while an indemnity for fire damage to the premises is not (contractual liability coverage and insured contracts). Your lease may promise more than the policy delivers.

Property and rent: who insures what

The landlord's property policy covers the building and its base-building systems. The tenant covers everything it owns or paid to build. Disagreements over improvements are common: if the landlord paid for the build-out through an allowance, it may insist that it owns and insures it; if you paid, it is yours. The lease should say which. A mutual waiver of subrogation in the lease works only if both property policies permit it. The standard ISO property conditions (CP 00 90) let an insured waive recovery rights in writing before a loss, and after a loss only for limited parties such as a tenant, but a manuscript policy may differ.

Rent is the other piece. A casualty clause typically abates rent if the premises are untenantable. Your business income coverage pays continuing expenses, payroll and lost profit during the restoration period, so check the limit against your real exposure (business interruption insurance: how business income coverage works).

Where leases and certificates go wrong

1. Certificate versus endorsement. Landlords accept certificates, but the right to additional insured status comes from the endorsement. Ask your broker for the endorsement itself. See certificates of insurance: what they prove and what they do not.
2. Cancellation notice. Leases often demand 30 days' notice of cancellation. Since ACORD's 2009 revision, the ACORD 25 certificate refers back to the policy's cancellation provisions rather than promising the holder advance notice (IIABA's explanation), so notice requires a cancellation-notice endorsement or a carrier practice.
3. Deductible caps. Some leases limit your deductible to a stated dollar amount. Check against your actual deductible (deductibles vs self-insured retentions: who pays first).
4. Assignment and subletting. Sublessees often must carry the same coverage.

Negotiating before you sign

Request the insurance exhibit with the first draft, send it to your broker, and ask what each requirement would cost. Limits, the aggregate wording, the additional insured scope and the carrier rating floor are negotiable, particularly for small tenants. The contract insurance requirements checker and Certificate of insurance (COI) review checklist help you compare. If you are the landlord instead of the tenant, Landlord insurance covers your own program.

Key takeaways

• Expect the lease to require CGL with additional insured status, primary and non-contributory wording and a waiver of subrogation, and to charge you if you do not comply.
• A certificate is not an endorsement; ask for the endorsement forms the lease names.
• Your CGL covers legal liability for fire damage to rented premises, up to a separate limit, but not other damage to the space.
• Decide in the lease who owns and insures the improvements, and check that your property and business income limits match what you must restore.
• Review the insurance exhibit with your broker before you sign, while the terms can still change.