When was the last time you reviewed the property insurance section in your lease?
Yes, it sounds incredibly boring. But, it may be necessary – READ ON.
In commercial real estate leasing, landlord and tenants frequently rely on forms they have used in past transactions without giving thought to updating for terminology or more substantive changes. We often see lease forms proposed by “the other party” or by other lawyers that contain out-of-date property insurance terms and because of that out-of-date terminology, fail to provide proper (and expected) insurance protections. It is important for both landlords and tenants to understand what is (or is not) covered by their respective property insurance policies as well as each other’s policies. You need to understand what you are asking for and whether you are getting the coverage you expect.
Older real estate leases often describe the type of property insurance required as “Basic Form” (formerly, “fire and extended coverage”) or “Broad Form” coverage. However, landlords in particular are much better protected if their lease requires the tenant to provide “Special Form” (formerly known as “all risk”) or “special extended coverage” property insurance. The old terminology of Basic Form protects the insured against only fourteen causes of loss (unless the policy is otherwise amended) and using the term “Broad Form” adds only five additional causes of insured loss. Both Basic Form and Broad Form include long lists of exclusions from coverage and, to recover under either type of policy, the insured must prove a loss resulted from one of the named causes of loss and was not otherwise excluded from coverage.
Special Form or special extended coverage, on the other hand, provides coverage from loss from all causes not specifically excluded (endorsements to the policy may be available if the insured wants coverage for some exclusions.) In order to recover under this form, the insured need not prove which type of loss caused the damage, only that the type of loss was not specifically excluded. Because forms and nomenclature within the insurance industry change frequently, a properly drafted commercial lease should use wording such as “Special Form or its equivalent” in the property insurance requirements. The Special Form coverage premium is relatively little more than the Basic and Broad Form and therefore the Special Loss coverage is now the most commonly used in commercial leasing.
A few more items to look for in the property insurance section in your lease form:
Are you (landlord) required to be named as a loss payee? Is 100% insurable replacement value with no coinsurance penalty required? Is there an A. M. Best’s minimum rating requirement for the other party’s insurance company? Is there a waiver of subrogation requirement? Do you know if your or the other party’s insurance policy permits a waiver of subrogation or is an endorsement needed? What evidence do you have that the property insurance coverage is in place? Did you (landlord) receive a current ACORD certificate (entitled “Evidence of Commercial Property Insurance”)? Did you (landlord) receive a copy of the Declarations page (which shows the amounts of insurance, name of insured party, and all endorsements) to the insured’s policy?
Now, go pull out your lease to see what it actually says.
Next time, we’ll talk about your CGL coverage.
By D. Jean Shaw
D. Jean Shaw is an attorney with Horenstein Law Group PLLC and focuses on all aspects of complex real estate law, including complex commercial real estate development, due diligence, acquisitions, dispositions, leasing and financing.