Understanding Your Lease Requirements for Property Insurance

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Understand Your Lease
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In the world of commercial real estate leasing, landlord and tenants frequently rely on forms they have used in past transactions without giving much thought to whether their document needs to be updated — either for terminology or substantive changes.

At Horenstein Law Group, we often see lease forms proposed by “the other party” — or even by other attorneys — that contain not only out-of-date property insurance terms but also (because of that out-of-date terminology) fail to provide proper (and expected) insurance protections.

As a practical matter, 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.

Leases and Property Insurance

Older real estate leases often describe the type of property insurance required as “Basic Form” (formerly known as “fire and extended coverage”) or, in some cases, “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 14 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. 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 that are not specifically excluded (and, to the extent the insured wants coverage for some of those exclusions, endorsements to the policy may be available). Additionally, 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. Given that there is a relatively small additional premium for the Special Form coverage over the Basic and Broad Form, the Special Loss coverage is now the most commonly used in commercial leasing.

What to Look For

And here are 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 percent 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 fact, in place? At a minimum, did you (landlord) receive a current ACORD certificate (entitled “Evidence of Commercial Property Insurance”)? Better yet, 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 form to see what it actually says!

Horenstein Law Group is ready to help you bring it up to date so that you have the protection you need.

Next time, we’ll talk about your CGL coverage.

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