INSURANCE GOTCHA CLAUSES IN LEASES. Jon F. ( Chip ) Leyens, Jr. Steeg Law Firm, LLC. Assumptions

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2 INSURANCE GOTCHA CLAUSES IN LEASES Jn F. ( Chip ) Leyens, Jr. Steeg Law Firm, LLC Assumptins The list f ptential gtcha clauses set frth belw is based n the assumptin that with respect t prperty insurance, the parties t the lease desire t shift the risk f insured lsses t the applicable insurers. The cmments regarding indemnity clauses assume that the parties want their respective indemnity bligatins t be limited t cverage available either thrugh specialfrm prperty insurance r CGL insurance. The cmments generally reflect a tenant s perspective and als are mre relevant t a lease fr space in a multi-tenant facility with sme srt f perating cst pass-thrugh mechanism. Starting Pint: the Waiver and Release Clause: What is the scpe f damage and/r insurance subject t the waiver and release clause? Is the waiver and release clause drafted t apply just t prperty damage and prperty insurance, r des it als include persnal injury and CGL insurance? Generally, subrgatin waivers are included in standard frms f prperty insurance r btainable thrugh endrsements at n additinal cst. There is a premium charge, hwever, fr waiver f subrgatin endrsements fr CGL plicies, and the number f claims n a CGL plicy culd affect the premium and/r availability f plicy renewals. Is the waiver and release limited t the amunt f insurance prceeds recvered r des it include all claims fr prperty damage (i.e., is the party whse prperty was damaged reserving the right t g after the ther party t recver the amunt f the damaged party s insurance deductible r ther self-insured retentin)? If deductibles and ther self-insured retentins are carved-ut f the waiver and release, is there a cap in the lease n such amunts? Des the party at fault fr the prperty damage have sufficient prperty damage cverage under its CGL plicy t cver the amunt f the deductible in the ther party s prperty insurance? If the deductible amunt is cvered by the waiver and release, why is each party agreeing t absrb that cst? 1

3 Negligence carve-uts: if the bject f a waiver and release clause is t create a s-called n fault apprach whereby the risk f an insured lss is shifted t the insurer regardless f either party s fault, des a carve-ut fr a party s negligence, grss negligence r intentinal fault defeat the purpse f the clause? Failure t maintain insurance: If the waiver and release is tied t the amunt f insurance recvered by the waiving party, then it als shuld make reference t the amunt f insurance the waiving party wuld have recvered had it maintained the insurance required under the lease. Otherwise, a party culd fail t maintain the required insurance and then sue the at-fault party t cver its uninsured lsses. Cnflict with ther lease prvisins: Include a ntwithstanding any ther prvisin f this lease r cmparable clause s that the waiver and release clause cntrls ver ther gtcha clauses listed belw. Gtcha Clauses: Maintenance and repair: Des the lease state that the tenant will be respnsible, at its sle cst and expense, fr repairing any damage it causes t the premises r the building, withut reference t the waiver and release clause? If s, the waiver and release clause is ptentially undermined. Tenant imprvements: Des the lease require the tenant t insure and restre tenant alteratins in the event f a casualty? Althugh this type f language des nt specifically undermine a waiver and release clause, it arguably requires the tenant t carry prperty insurance that is duplicative f that carried by the landlrd and culd cmplicate the perfrmance f casualty restratin wrk Indemnity: Des the lease require the tenant t indemnify and hld the landlrd harmless frm any and all damage t landlrd s prperty, withut reference t the waiver and release clause? If s, the waiver and release clause is ptentially undermined. What items in an indemnity clause wuld nt be cvered by a party s CGL plicy? If the tenant indemnifies the landlrd against claims arising frm the tenant s negligence and the tenant s negligent failure t return an estppel causes the landlrd s sale f the building t fall thrugh, the tenant likely has a large indemnity claim that is nt insured. If the tenant indemnifies the landlrd against claims arising frm the tenant s vilatin f the lease and the tenant s lease default in turn triggers 2

4 a default by the landlrd with the landlrd s lenders, what is the tenant s ptential uninsured indemnificatin liability? There may be ther lease clauses (such as a waiver f cnsequential damages) that culd prtect the tenant, but the tenant likely wuld prefer t avid such a claim altgether. Rent abatement: Is rent abatement fllwing a casualty cnditined n the tenant nt having caused the casualty? Althugh this type f language des nt specifically undermine a waiver and release clause, it arguably denies the tenant f a benefit f the insurance plicy paid, at least in part, by tenant s perating expense pass-thrughs. In additin, the landlrd s ability t recver business interruptin (lss f rent) prceeds frm its prperty insurer shuld nt be affected by a tenant s negligence in causing the casualty. Operating Expenses: Shuld a landlrd be able t pass thrugh the amunt f its prperty insurance deductible even if the cst f the casualty repair wrk being perfrmed shuld be capitalized? Examples f Gtcha Clauses (with cmments): Clause 1: This might nt lk t bad at first, but lks can be deceiving: 11.1 Claims. Claims means any and all liabilities, lsses, claims, demands, damages r expenses that are suffered r incurred by a party, including attrneys fees reasnably incurred by that party in the defense r enfrcement f the rights f that party. [Nte: This definitin is nt limited t persnal injury r prperty damage claims (which generally are insurable) and als is nt limited t third party claims (s a claim by the landlrd against the tenant fr prperty damage is within the scpe f this definitin). Have the parties waived cnsequential damages elsewhere in the lease? If s, is this clause in cnflict with the waiver?] 11.2 Tenant s Indemnity. (a) Landlrd s Waivers. Landlrd waives any Claims against Tenant and its Affiliates fr perils insured r required t be insured by Landlrd under subsectins (2) and (3) f 9.2(a) [Nte: this is a crss-reference t Landlrd s prperty insurance], except t the extent caused by the grss negligence r willful miscnduct f Tenant r its Affiliates [Nte: The last clause is a large exceptin t the waiver f claims. Is it warranted? It certainly seems like it culd prvide sme wrk fr the litigatrs.]. (b) Claims Against Landlrd. Unless waived by Landlrd under (a), Tenant will indemnify and defend Landlrd and its Affiliates and hld each f them harmless frm and against Claims arising frm: 3

5 (1) Any accident r ccurrence n r abut the Premises, except t the extent caused by the negligence r willful miscnduct f Landlrd r its Affiliates; (2) Tenant s r its Affiliates negligence r willful miscnduct; [Nte: Shuld the tenant have t indemnify the landlrd against the tenant s negligent failure t return an estppel n time?] (3) Tenant s failure t cmply with this Lease; r [Nte: If the tenant des nt pay rent and the landlrd s lender freclses, has the tenant just signed up as a guarantr n the landlrd s lan?] (4) Any claim fr cmmissin r ther cmpensatin by any persn ther than the Brkers fr services rendered t Tenant in prcuring this Lease. Clause 2: The ver-brad indemnity (if yu are representing the tenant). 1.1 Tenant's Indemnificatin f Landlrd (including Indemnity by Tenant fr Landlrd's Negligence). (a) TENANT SHALL INDEMNIFY, DEFEND, AND HOLD HARMLESS ALL LANDLORD PARTIES (AND WAIVES ANY CLAIM AGAINST ANY LANDLORD PARTY WITH RESPECT THERETO) FROM ALL FINES, SUITS, LOSSES, COSTS, LIABILITIES, CLAIMS, DEMANDS, ACTIONS AND JUDGMENTS OF EVERY KIND AND CHARACTER, WHETHER IN LAW OR IN EQUITY (COLLECTIVELY, "CLAIMS"), INCLUDING THOSE CLAIMS RESULTING SOLELY OR IN PART FROM THE NEGLIGENCE OF ANY LANDLORD PARTY, ARISING OUT OF OR RELATING (DIRECTLY OR INDIRECTLY) TO THIS LEASE, THE TENANCY CREATED UNDER THIS LEASE OR THE PREMISES, INCLUDING, WITHOUT LIMITATION: [Nte: Tenant has just indemnified the Landlrd fr everything, including when the landlrd vilated its exclusivity agreement with its anchr tenant by entering int this lease agreement.] (i) ANY BREACH OR DEFAULT IN PERFORMANCE OF ANY OBLIGATION ON TENANT'S PART TO BE PERFORMED UNDER THIS LEASE, WHETHER BEFORE OR DURING THE LEASE TERM OR AFTER ITS EXPIRATION OR EARLIER TERMINATION; [Nte: As nted in the cmments t Clause 1 abve, this default indemnity culd expse the tenant t significant liability fr third-party actins against the landlrd, ptentially including the claims f the landlrd s freclsing lender. In additin, a party culd argue that damages arising frm lease vilatins shuld be cvered slely by the default sectin, instead f als being cvered by an indemnity clause.] (ii) ANY ACT, OMISSION, NEGLIGENCE, OR MISCONDUCT OF ANY TENANT PARTY, OR OF ANY OTHER PERSON ENTERING UPON THE PREMISES UNDER OR WITH THE EXPRESS OR IMPLIED INVITATION OR PERMISSION OF TENANT; [Nte: The tenant is indemnifying the landlrd fr the landlrd s miscnduct within the Premises, and depending n applicable state law, this clause ptentially culd include the landlrd s intentinal miscnduct.] 4

6 (iii) ANY ALTERATIONS, ACTIVITIES, OCCURRENCES, WORK, OR THINGS DONE, PERMITTED, ALLOWED, OR SUFFERED BY TENANT PARTIES IN, AT, OR ABOUT THE PREMISES OR THE PROJECT, INCLUDING THE VIOLATION BY ANY TENANT PARTY OF ANY LAW, ORDINANCE, OR GOVERNMENTAL ORDER OF ANY KIND; AND [Nte: In ther wrds, the tenant is respnsible fr anything that ccurs utside the premises if allwed r suffered by the tenant. Fr example, if the landlrd is respnsible fr maintaining cmmn parking areas, but the tenant fails t mve a stray shpping cart t its prper lcatin, this clause culd shift the liability fr any resulting claim t the tenant.] (iv) THE OCCUPANCY OR USE BY ANY TENANT PARTY OF THE PREMISES OR THE PROJECT. [Nte: As nted abve in this clause, this language culd cause the tenant t indemnify the landlrd fr breach f an exclusivity clause that is unknwn t the tenant, even if the applicable use by the tenant is explicitly permitted under its lease.] (b) TENANT SHALL FURTHER INDEMNIFY, DEFEND, AND HOLD HARMLESS ALL LANDLORD PARTIES FROM ANY CLAIM FOR DAMAGE TO THE SPECIAL USE IMPROVEMENTS OR TENANT'S PERSONAL PROPERTY, FIXTURES, FURNITURE, AND EQUIPMENT IN THE PREMISES (INCLUDING THOSE CLAIMS RESULTING SOLELY OR IN PART FROM THE NEGLIGENCE, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF ANY LANDLORD PARTY), TO THE EXTENT THAT THE DAMAGE IS COVERED BY PROPERTY INSURANCE (WITHOUT REGARD TO ANY DEDUCTIBLE) THAT TENANT IS REQUIRED TO CARRY UNDER THIS LEASE (OR WOULD HAVE BEEN COVERED HAD TENANT CARRIED THE INSURANCE REQUIRED UNDER THE PROVISIONS OF THIS LEASE), OR WHICH COULD HAVE REASONABLY BEEN COVERED BY INSURANCE; AND IF TENANT IS EXPRESSLY ALLOWED BY THIS LEASE TO SELF-INSURE FOR SUCH MATTERS, IT SHALL BE DEEMED TO BE CARRYING SUCH INSURANCE FOR THE PURPOSES OF THIS PARAGRAPH. 5