Exclusively from Foa & Son
Leases are always a potential source of insurance problems. Attorneys who draft them may be quite knowledgeable about real estate law but are often unsophisticated about insurance. It’s not uncommon to find language addressing required insurance that uses terms that are obsolete or even antiquated, and indemnification provisions can often be written in ways that no insurance policy could cover. And for most tenants, insurance and indemnification provisions in leases are often an afterthought, even though they can contain unpleasant surprises.
Issues arising from damage to space you rent or lease are a fairly common problem. Landlords will commonly maintain a property insurance policy on the building, while tenants insure their own contents. When there is insured loss or damage, each party’s insurance pays them for their respective loss. It’s not uncommon, though, for there to be some allegation of responsibility or liability for such a loss, for instance, some suggestion that an act or omission by the tenant occupying the space that caused the loss. When that happens the landlord’s insurance company can be relied on to pursue recovery for what they paid from the tenant who is allegedly responsible for the loss; this is called subrogation, and insurance companies maintain large staffs for just this purpose.
Real estate attorneys and tenants might assume that such a claim would be covered by the tenant’s general liability policy; after all, that policy covers both bodily injury and property damage. While the general liability policy does in fact cover property damage liability, there is an important standard exclusion in the policy for damage to “property you own, rent, or occupy”.
Because of this standard exclusion the only coverage available for such claims comes by way of two exceptions to that exclusion built into the policy. Fire damage legal liability coverage is an exception to the exclusion with respect to fire damage to rented premises; if you are judged to be liable for causing a fire, this will cover you for claims by the landlord or their insurance company. There will always be a separate sublimit for this coverage; $50,000 or $100,000 is standard, although that can be increased. Of course, if the loss was from something other than a fire, you’re out of luck. There is also an exception for short-term premises rentals, usually defined as seven days or less. Under either of these exceptions, coverage only attaches if the tenant is found liable for the damage, and only up to the sublimit.
A far better approach is to incorporate a waiver of subrogation into the lease. All that does is say that each insurance company will pay their policyholder for a loss, and won’t pursue the other. This should go both ways; landlords don’t want tenant’s insurance companies chasing them, either.
If you already have a lease that lacks this important clause, we’ll have to adjust your insurance policy to pick up the slack. We’ll need to review your lease(s) to figure out the best way to do that.
For most tenants, insurance and indemnification provisions in leases are often an afterthought, even though they can contain unpleasant surprises.