Negotiating Insurance Provisions for Commercial Landlords

Originally published by the Daily Journal of Commerce on December 3, 2024.

When commercial landlords negotiate leases with prospective tenants, they understandably focus on key commercial terms, such as rental rate and renewal options. While that focus is justified, landlords should never overlook the “boilerplate” language of the lease, especially the insurance provisions. To protect landlords’ real estate assets, carefully crafted insurance provisions are essential. Some key considerations for landlords drafting commercial lease insurance provisions are outlined below.

When there is damage to the property, the parties should first look to the lease to determine who bears responsibility for the repairs. The breakdown of responsibility is negotiable, and details vary based on whether it is a single tenant or multi-tenant structure. However, usually the tenant bears responsibility for repair of the interior and nonstructural portions of the leased premises, while the landlord must repair structural elements of the building, such as the roof, exterior walls, and any common areas.

Commercial leases are often silent on landlord insurance requirements. However, landlords can extend an olive branch to tenants in lease negotiations by agreeing, at minimum, to maintain any insurance policies required by their mortgage lender. Additionally, landlords may consider implementing the following additional insurance policies:

Rent loss insurance

Landlords may consider rent loss insurance to protect their cash flow in a situation where the leased premises are unavailable due to a casualty event and the landlord agrees to abate the tenant’s rental obligations during such period. Conversely, landlords may require tenants to provide business interruption insurance to cover a loss of revenue during such an incident.

Improvements and betterments

Landlords should consider additional insurance coverage for improvements made with tenant improvement allowances. When tenants build out the leased premises with tenant improvement allowances, such improvements typically become the property of the landlord upon the lease expiration. Landlords should either increase the coverage amount of their property insurance to account for the increase in value or require the tenant to insure the improvements during the term.

Code-mandated changes

Landlords should consider obtaining an endorsement to cover costs associated with improvements required under changes to municipal code or other applicable law.

With respect to tenant insurance requirements, landlords should first consider how the tenant intends to use the leased premises. Based on the risks presented by the tenant’s intended use, the landlord should negotiate to ensure the tenant is adequately insured to repair and maintain the leased premises. Landlords should require that tenants deliver certificates of insurance to evidence coverage amounts and they should review the certificates carefully upon receipt. At minimum, landlords should require tenants to maintain the following policies during the lease term:

Commercial general liability (CGL)

Landlords should be named as an “additional insured” on the policy and ensure that the CGL policy includes endorsements that address risks posed by the tenant’s intended use, such as liquor liability or mobile equipment coverage.

Property insurance

Tenants should insure their personal property with either: (i) a named perils policy, or (ii) an all-risk policy. A named perils policy insures only for certain types of risk, while an all-risk policy covers all risks, but specifically excludes certain items.

Workers’ compensation

State law often requires tenant businesses to maintain certain minimum coverage amounts.

Beyond the specific insurance policies to be maintained by each party, landlords should be mindful of the following general principles:

Mutual waiver of subrogation

Landlords should ensure that tenants waive their subrogation rights against the landlord. Tenants often require a reciprocal waiver, which landlords should be willing to provide.

Replacement vs. actual cash value

Insurance policies will either cover the full replacement value of the property or the actual cash value, which factors in depreciation over time. Replacement value is typically more expensive but provides more protection in the event of a casualty.

Risk management review

Landlords should have an internal risk management professional or insurance broker review the insurance provisions of the lease to ensure coverage is adequate to underwrite the risks posed by the operation of the property.

Though insurance policy details may make even the most well-meaning landlords drowsy, the details can have a profound impact on the landlord’s business in the event of a casualty. Synchronizing the landlord’s requirements as a mortgagor under a commercial mortgage with the provisions of commercial leases on their property requires careful consideration. Landlords should not only negotiate these provisions when entering a new lease, but they should review existing policies from time to time to ensure coverage amounts are sufficient to protect their interests.

Patrick Abell is a Stoel Rives LLP associate and a member of its real estate group. Contact him at 503-294-9472 or patrick.abell@stoel.com.

Elizabeth Clampitt is a Stoel Rives LLP associate and a member of its real estate group. Contact her at 206-386-7645 or elizabeth.clampitt@stoel.com.

The opinions, beliefs and viewpoints expressed in the preceding commentary are those of the authors and do not necessarily reflect the opinions, beliefs and viewpoints of the Daily Journal of Commerce or its editors. Neither author nor the DJC guarantees the accuracy or completeness of any information published herein.