Insurances required under a commercial lease

Whilst both the landlord and the tenant have an insurable interest in the leased premises, the building in which the leased premises are located and the risk of property damage and personal injury, the amount of their respective interests may vary depending on the repair obligations and other rights and obligations under the lease.

Accordingly, it is important to carefully consider what insurances should be maintained by each party under the lease. 

What insurances are typically required under a lease?

The insurances that a landlord and tenant may be required to maintain under a lease will vary depending on, among other things, the bargaining power of the parties and the prevailing market conditions at the time the lease is negotiated. 

Typically, in a commercial lease a tenant will be required to maintain insurance in respect of:

• public liability in respect of the premises;
• damage to and loss of property (including but not limited to internal and external glass (including plate glass), fittings, chattels, the landlord’s fixtures and the tenant’s property that are on or in the premises); and
• employer’s liability in respect of the tenant’s employees (including worker’s compensation insurance);

Typically, a landlord will be required to maintain insurance in respect of:

• the building (against loss and damage); and
• public liability in relation to the building and the common areas.

The costs of these landlord insurances are usually recoverable from the tenants in the building through the variable outgoings.

The existence of the tenant’s public risk and plate glass policies does not mean that a landlord should not separately obtain insurance in respect of these matters.  The landlord’s interest in the property typically exceeds the tenant’s interest and insurance cover, particularly in relation to a lease of part of a building, where the landlord’s interest includes the entire building, including common areas.

A landlord will also often take out insurance to protect against loss of rent due to damage to the building or rent default.

What does it mean when the interest of a party is “noted”? How is this different to a co-insured?

Most commercial leases include a clause requiring that any policy of insurance obtained by the tenant is endorsed to note the interest of the landlord in the premises.

Where a party’s interest is noted on a policy of insurance, that party can make a claim under the insurance policy against the insurer despite not being a party to the insurance contract.¹

Conversely, a co-insured party is a party to the contract with the insurer and has a direct contractual claim against the insurer.

In some commercial leases, the landlord and tenant are required to maintain joint insurance in respect of certain risks.  Whilst unusual, joint insurance can provide some benefits including cost savings for the parties and a reduced risk of a gap in insurance coverage.  This type of insurance is generally limited to leases where the tenant leases the entire property.

In order for the insurances under the lease to be fully effective, the indemnities in the lease need to be consistent with the level of insurance cover. For example, if the tenant has a cap on its liability in respect of damage to the building, that can result in an increase in the premium payable for the insurance because the insurer’s right of recovery from the tenant (where the tenant has caused the damage) may be limited.

Assessment of the risk

The landlord needs to carefully analyse the risks the landlord needs to insure against. This involves a consideration of all of the circumstances surrounding the tenant’s use of the leased premises.

Industrial premises have a completely different risk profile to an office building. A permitted use of explosives manufacture has a very different risk profile to a permitted use as an office.

In special purpose premises, we recommend an insurance risk analysis by a suitable insurance broker or risk assessor.  

What is a certificate of currency?

A lease will typically require that the tenant provide the landlord with a copy of the insurance policy or certificate of currency on request.

A certificate of currency is a document issued by the insurer which confirms that the insurance policy is current.  It includes details in respect of the type of insurance purchased, the amount of money applicable to the liability insured against and the policy expiry date.

Comment

It is important for both landlords and tenants to carefully consider the insurance provisions contained in the lease as covenants relating to insurance are often closely related to provisions in the lease which deal with:

• repair and damage or destruction to the building or leased premises;
• abatement of rent; and
• entitlement to terminate the lease in the event of damage to or destruction of the premises.

Lavan regularly provides assistance to landlords and tenants in negotiating lease terms.  If you have any questions in relation to the issues raised in this article, please do not hesitate to contact us.