The Tenant's Insurance

Many large corporate tenants prefer to carry their own fire and casualty insurance rather than have the landlord carry it and then reimburse the landlord for the premium. These tenants generally find that with their multiple locations they can save considerable money on the premium as compared to what most landlords would pay.

Having the tenant carry the insurance is fine, but before the lease is signed the landlord must be sure that the form and amount of coverage are adequate. A thorough review of all pertinent lease clauses by counsel and by the landlord’s insurance advisers is essential, but here is a partial checklist of items to look for.

• Be sure that the tenant’s insurance will comply with all the lender’s requirements as contained in the deed of trust. For example, the amount of coverage and the carrier’s rating should be consistent with the deed of trust.
• The form of the policy should be “Causes of Loss-Special Form,” which is the most inclusive form of coverage available, although it does not cover earthquake, flood or terrorism.
• Ideally the coverage should be for full replacement costs, but at a minimum the policy should be in an amount sufficient to avoid any co-insurance penalty. Generally this minimum amount is 80% of insurable value.
• If the tenant intends to self-insure for a substantial portion of any loss or to carry a large deductible, then the tenant should be required to have adequate net worth to justify doing so. And whatever net worth figure is agreed upon should represent tangible net assets and be indexed for inflation over the term of the lease.
• Do not forget about coverage for any rental loss. Most leases provide for rent abatement when the premises are not useable because casualty damage is being repaired. If the landlord were carrying the insurance, rental loss coverage would generally be provided under an endorsement to that policy and the tenant would be paying for the premium. But if the tenant is insuring the property its coverage will probably not include loss of rents. The landlord could buy separate coverage, but doing so would be expensive, and the tenant probably will not want to pay for it. The solution to this problem is to have the tenant forego the right to rent abatement and to rely instead on its own business interruption insurance.