It goes without saying that most people find the arcane world of insurance to be difficult to fully understand. It is always easier to let the “insurance brokers” or “in-house insurance gurus” negotiate the insurance provisions of a lease. However, a basic understanding of the most common insurance concepts is very helpful in negotiating a letter of intent or a lease. It is the goal of this article to provide a simple “primer” on the ten most common insurance concepts encountered during lease negotiations.
1. First Party Insurance:
First party insurance is the insurance obtained by a party to protect itself from loss to its own property. For a landlord, this insurance typically takes the form of “all-risk” coverage, “special form-causes of loss” coverage or “fire and extended” coverage. In the event of a casualty to the property covered by the insurance policy, the party insured receives insurance proceeds to rebuild the property damaged or destroyed. This insurance is referred to as “first party” insurance because it covers damage to the insured (i.e., the “first party”).
2. Third Party Insurance:
Third party insurance is commonly referred to in a lease as “comprehensive” or “commercial general liability” insurance. In the case of the landlord, this insurance covers losses suffered by “third parties” as a result of the acts, conduct, negligence or gross negligence of the landlord. A common example of a covered loss would be when a customer of one of the tenants in the shopping center slips and falls in the parking lot because of a pothole or crack. The landlord typically maintains third party insurance on the common areas so that it has insurance coverage to pay the losses suffered by such a customer.
3. Additional Insured vs. Named Insured:
A tenant will often desire to be named as an additional insured on the landlord’s third party insurance policy in connection with the common area. Likewise, the landlord will usually want to be named as an additional insured on the tenant’s third party policy of insurance in connection with the premises. By doing this, the party named as an additional insured receives the benefit of the third party insurance policy. In addition, the additional insured will receive notices regarding changes or cancellation in coverage.
4. Loss Payee:
Sometimes a landlord (or its lender) requires the tenant to name it as a “loss payee” on the first party insurance maintained by the tenant on the tenant’s building or leasehold improvements. By being named a “loss payee”, the landlord would have to be named on any check made payable by the first party insurer to the tenant.
5. Waiver of Subrogation:
The terms “subrogation” and “waiver of the right of subrogation” are some of the most misunderstood concepts in the insurance provisions of a lease.
“Subrogation” means to “stand in the shoes” of another. For example, if a landlord maintains insurance on a tenant’s premises, and the premises are burned down by the negligence of one of the tenant’s employees (e.g., a lit cigarette butt is accidentally thrown in a waste basket), the landlord would still be insured for such casualty, and would still have the right to receive insurance proceeds from its first party insurer to pay for the rebuilding of its premises. However, in this situation, the landlord may have a legal claim against the tenant for the negligent actions of its employee in burning down the premises. Because the landlord has insured for such an event through its first party insurance, it would not bring a legal claim against the tenant. However, as part of its insurance policy with the first party insurer, the landlord will have assigned to its insurer its rights to bring this legal claim against its tenant. Therefore, the insurer will have the right of subrogation (i.e., the right to “stand in the shoes” of the landlord) in connection with this claim and have the right to sue the tenant to recover the insurance proceeds paid to the landlord (its insured).
6. Self Insurance:
In essence, when a party self insures a particular risk that is otherwise covered by insurance, the party providing the self insurance agrees to pay (out of its own pocket) any claims that would have been covered had the party maintained the subject insurance.
7. Rental Loss Insurance:
Rental loss insurance is often maintained by landlords. It is often required by the landlord’s lender. Rental loss insurance protects the landlord from the loss of income from its tenants in the event of a casualty covered by its first party insurance.
8. Business Interruption Insurance:
Business interruption insurance is often maintained by the tenant so as to provide it with the necessary funds to pay its rent to the landlord in the event of a casualty to the premises. As with rental loss insurance, business interruption insurance is only available for those casualties typically covered by the first party insurance insuring the premises.
9. Best's Key Rating Guide:
People are often confused by lease provisions which require policies of insurance maintained by a party to be issued by insurance companies with a general policy holder’s rating of a certain level (such as “A”) and a financial rating of another level (such as Class “X”), as rated in the most current available “Best’s Key Rating Guide”. These are simply ratings that shed light on the financial capabilities and performance levels of insurance companies.
10. Blanket or Umbrella Insurance:
Blanket or umbrella insurance typically refers to one insurance policy that covers many locations. The benefit of this type of coverage is that it is usually less expensive than insuring each property with separate insurance coverage.
The foregoing is a summary of some of the most important and commonly negotiated insurance-related concepts in retail leasing. Understanding these concepts will greatly enhance your ability to negotiate these principles in your upcoming lease transactions.
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