What a commercial lease’s insurance section requires

A commercial lease’s insurance section usually requires you to carry general liability at a set limit, name the landlord (and often its property manager and lender) as additional insureds, waive your insurers’ right to recover from the landlord, and insure your own contents, improvements, and lost income. Most of it can be met with a standard small business policy and the right endorsements.

The clause that can cost you the most isn’t insurance at all. It’s the indemnity clause, and an attorney should review it before you sign.

What liability limits do landlords ask for?

For a small commercial space, $1,000,000 per occurrence and $2,000,000 in the aggregate is the most common request. Retail centers and buildings with restaurants often want an umbrella on top, and some leases let the landlord raise the limits during the term, which can catch a tenant by surprise in year five.

Three smaller items hide nearby. If you serve alcohol, the lease may require liquor liability. If you have several locations, it may ask for the aggregate to apply per location, which is what CG 25 04 does. And your general liability policy carries a separate, smaller limit for fire damage to the space you rent, shown on the dec page as damage to premises rented to you, which some leases ask you to raise.

What does naming the landlord as an additional insured do?

Most leases require it. It extends your liability coverage to the landlord for claims tied to your space, so if a customer trips in your store and sues you both, the landlord can look to your policy for its defense instead of its own. The usual endorsement is CG 20 11, written for managers or lessors of premises, and it covers the landlord for liability arising from the part of the premises leased to you, not the whole property. Some leases ask for CG 20 26 instead, which names a specific person or organization.

Get the names exactly right. Leases often list the landlord’s legal entity, its property manager, and its lender, and each one has to appear on the endorsement the way the lease spells it. A certificate alone doesn’t make anyone an additional insured; the endorsement does.

Many leases also ask for your coverage to be primary and noncontributory, which means your policy pays before the landlord’s own and doesn’t ask the landlord’s insurer to share. That takes wording on your policy, often CG 20 01.

Why does the lease want a waiver of subrogation?

When an insurer pays a claim, it can usually sue whoever caused the loss to get its money back. That’s subrogation. Say a fryer fire starts in your kitchen and damages the building. The landlord’s property insurer pays for the repairs, then sues you, as the party whose equipment started the fire, to recover what it paid. A waiver of subrogation blocks that suit.

Most leases make the waiver mutual: you waive recovery against the landlord, and the landlord waives against you, for losses covered by property insurance. Your policy has to allow it. Most commercial property forms do, as long as the waiver is signed before the loss. For general liability and workers’ comp, it usually takes an endorsement, CG 24 04 on the liability side and WC 00 03 13 for workers’ comp.

Check that it runs both ways. A one-way waiver stops your insurer from pursuing the landlord but leaves the landlord’s insurer free to pursue you.

Who insures the build-out, the income, and the glass?

The lease decides who owns and who insures improvements and betterments: the walls, flooring, lighting, and fixtures that get built into the space. When you pay for them, you usually insure them as part of your business personal property. When the landlord pays through a tenant improvement allowance, the lease may put them on the landlord’s building policy, or it may still make you insure them and restore them after a loss. Ask which one before you build.

Say you lease 3,000 square feet for a coffee shop and spend $180,000 on the build-out, with $70,000 in equipment and $15,000 in stock. If the lease makes you restore your improvements after a fire, your business personal property limit needs to cover roughly $265,000, not just the $85,000 you could carry out the door.

Most leases ask for business income coverage too, often 12 months. Read it next to the casualty clause. If your rent keeps running while the space is closed for repairs, business income is usually what covers that rent. If the lease stops rent until the space is usable again, that lost rent falls on the landlord, who usually carries loss of rents for it.

Glass is the sleeper. Retail leases often put storefront glass on the tenant even though the landlord owns it. Ask whether your property policy covers glass you’re responsible for under the lease, and at what limit, because some policies need an endorsement for it. Our page on retail stores covers the rest of a shop’s program.

Plenty of leases also require 30 days’ notice to the landlord if your policy cancels. Standard policies don’t promise notice to certificate holders, and many carriers won’t add it, so ask what your carrier can do before you agree to the clause.

Indemnity: have an attorney review it

Indemnity is a different animal. The indemnity or hold harmless clause is a promise in the contract itself, separate from the insurance requirements, and it can make you pay for claims connected to your space; some are written broadly enough to reach claims the landlord caused. Your general liability policy covers some of the liability you take on in a lease, but not every promise a lease can contain. This is general information, not legal advice. Have an attorney review the indemnity language before you sign, and we can show you how your policy lines up against it.

Questions to ask before you sign

Get answers to these before the lease is final:

• Who has to be named as an additional insured, by exact legal name, and on which policies?
• What limits does the lease require, and can the landlord raise them during the term?
• Does the waiver of subrogation run both ways?
• Who insures the improvements I pay for, and who has to rebuild them after a loss?
• Does rent stop while the space can’t be used after a fire or other casualty?
• Am I responsible for storefront glass?
• Does the lease require primary and noncontributory wording, or notice to the landlord if my policy cancels?
• Are there deductible caps or a minimum carrier rating?
• When are certificates due: before I get the keys, at every renewal, or both, and where do they go if the property manager changes?
• What does the indemnity clause make me responsible for? That one is for your attorney.

If you have a lease in front of you, send the insurance section through our free contract review, and we’ll explain what it requires and whether your current policy meets it. If you need a policy that meets it, start a quote.