Insurance Checklist Premises Lease Exposure and Coverage Survey

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1 The Premises Lease Survey is a guideline for obtaining and using informa on when reviewing a premises lease for risk and insurance solu ons. The survey is appropriate for an insurance agent-broker; property owner; tenant or real estate agent-broker. This survey does not replace the necessity to have competent legal counsel for both par es review the lease for proper compliance with legal requirements. It is advantageous for both the owner and tenant of leased property to have the lease reviewed for risk iden- fica on, avoidance and transfer to insurance prior to its execu on. Most insurance agent-brokers only have the opportunity to review a lease subsequent to the lease s execu on. Once the lease is finalized there may be limited methods available to minimize risk for the client or transfer risk to an insurance policy at an affordable premium. There are two parts to conduc ng a survey on a premises lease. First: the lease risk exposures must be iden fied. Second: The appropriate insurance coverages must be chosen based on the exposures iden fied. Third: Iden fy available insurance solu ons. The following survey outlines the steps that must be taken to analyze the premises lease risk and placing appropriate coverage. Step #1 Lease Exposure Review Most insurance companies expect that the broker/agent will personally meet with the prospect prior to wri ng residen al coverage. The underwri ng of a residence property includes assessing the premises and the individual to be insured for acceptability. It is important that the en re lease be reviewed for risk, rather than just the insurance requirements. As is the case with all legal documents, some sec ons in the lease relate to other sec ons and many of those sec ons have an impact on proper insurance placement. The exposure review sec on will iden fy exposures from two perspec ves: the first from the property owner viewpoint and the second from the tenant viewpoint. It is important to note that there are many varia ons of lease language and this survey is not intended to cover every possible con ngency. In reviewing the lease the following informa on and requirements must be iden fied: 1. Iden fy the descrip on of leased premises 2. Iden fy the use of the premises 3. Iden fy the term of lease 4. Iden fy the type of lease 5. Iden fy the rent amount 6. Iden fy if there is a rent abatement/escape clause 7. Iden fy improvements, altera ons and addi ons made to the leased premises 8. Iden fy the indemnifica on / waiver of subroga on clauses in the lease 9. Iden fy if there is an exculpatory provision in the lease 10. Iden fy specific property insurance requirements 11. Iden fy specific liability insurance requirements Page 1

2 Step # 2 Iden fy the exposures to be insured The risk exposures are varied within a lease. Some risks may seriously impact a property owner and have no impact on the tenant. The reverse is equally true. In some cases, the property owner will a empt to transfer risk to the tenant. This is successful only to the extent that the tenant has either the financial resources or proper insurance that can respond in the event of loss. In some cases, it is not in the best interest of either party to transfer risk from the property owner to the tenant. For example: Some property owners may create a triple-net lease in which the burden for purchasing insurance is transferred to the tenant. This is, under most circumstances, not a decision that is helpful to the property owner. A similar, but different choice can be made by the property owner that can have a more beneficial impact. Step # 3 Iden fy the insurance coverages available to respond to iden fied risk Possible insurance solu ons will be indicated in the survey in conjunc on with the risk iden fied. The property owner may have different insurance solu ons from the tenant. Those differences will be iden fied in the survey. Page 2

3 Lease Exposure Survey Informa on Review Date: For Owner: For Tenant: Name: Premises Address: Mailing Address: NOTE: When issuing insurance coverage do not include a suite number, floor number or unit number in the descrip on of premises insured. This could limit coverage. Include those specifics as part of mailing address on the insurance policies. This applies to Owner and Tenant. 1. Iden fy the Premises Leased 1. Iden fy all areas leased (Descrip on needs to clearly iden fy all areas of the property leased, including storage, delivery areas and parking. Owner: This is important for the coverage provided by the Addi onal Insured Lessor endorsement on the Tenant s General Liability policy. Tenant: This is important for the coverage provided by the Tenant Improvements and Be erments coverage on the property policy. Coverage applies for TIBs in the por on of the building leased to the Tenant. 2. Iden fy the Use of the Premises 1. Is the purpose of use stated: Yes No 2. Is the use of the premises permi ed by zoning authori es: Yes No 3. Which party is responsible for compliance with building ordinances or zoning laws: 4. Does the lease make reference to lessee s obliga ons to respond for third party loss or premises remedia- on arising out of pollutants: Yes No NOTE: This sec on o en includes a reference to exis ng condi ons and may include reference to pollu on condi ons. 5. Is there a disclosure of exis ng condi ons: Yes No Page 3

4 Use of Premises Exposures / Insurance Solu ons 1. Purpose: Owner: Rent amounts affect the limit of insurance purchased for Rental Income. Tenant: Rent amounts affect the limit of insurance purchased for Business Income and Extra Expense. 2. Permi ed Use: Owner: Paragraph o en warrants that property is up to current code. The Owner should be careful about providing any warranty within the lease. Tenant: Owner may transfer risk of compliance with building codes according to use of the property. This may not be part of the Tenant s insurance coverages and may leave the Tenant uninsured for this risk. 3. Pollu on / Contamina on: Owner: Be careful if warran ng no exis ng condi ons. An a empt to transfer pollu on risk to the Tenant may prove to be economically useless unless the Tenant is required to carry Pollu on Remedia on coverage. Owner may need to be advised to purchase their own Remedia on coverage as federal (and likely state) law holds the Owner responsible to clean up owned property. Tenant: Acceptance of property as is could transfer pollu on clean-up risk to Tenant. High poten al cost. Cross reference to the hold harmless and indemnity provision in the lease. Even though the language under the indemnity / hold harmless paragraph might not specifically state pollutants, the language is typically broad enough to incorporate that responsibility. 4. Building ordinance compliance: Owner: Ordinance or law compliance is a serious financial exposure to demolish undamaged por on, rebuild and bring up to code. If the lease a empts to transfer obliga on to the Tenant to bring the por on of the building leased to the Tenant, this transfer will likely fail. Property insurance typically carried by the Tenant will not include this coverage. The General Liability policy carried by the Tenant will not include this coverage. Tenant: If accep ng responsibility to bring the leased por on of the building into code compliance, property and liability insurance does not typically include this coverage. If wri ng coverage for the Tenant on a package (not a BOP) this coverage can be provided as part of the Legal Liability Coverage Form, but only if the loss is due to the Tenant s negligence. Page 4

5 3. Iden fy the Lease Term 1. Lease Incep on Date: 2. Total Term of Lease: (Months/Years: 3. Renewal Extensions: (Months/Years: Lease Term Exposures / Insurance Solu ons 1. Owner: Rental Income coverage can include the amount of rent lost during the period of restora on, including income lost when lease is cancelled due to covered loss. Cross-reference to the abatement clause sec on. 2. Tenant: Property coverage pays for direct loss to the TIBs. Leasehold Interest coverage pays for the unamor zed value of TIBs when lease is cancelled due to covered loss. Payment is based upon the lease term and extensions. Cross-reference to the abatement clause sec on. 3. Owner: Increase the building insurance limit to include improvements made by the Tenant. Never rely upon the Tenant to buy insurance that is adequate to replace the improvements. This could result in a penalty on the Owner s own property insurance or inadequate insurance to pay for substan al damage. 4. Iden fy the type of lease 1. Gross Lease : Yes No - Gross Lease: Tenant pays the base rent. Owner pays the maintenance, insurance and taxes 2. Net Lease: Yes No - Net Lease: Tenant pays the base rent and maintenance costs. Owner pays the insurance and taxes 3. Triple Net Lease: Yes No Triple Net Lease: Tenant pays the base rent, maintenance, insurance and taxes. Owner requires the Tenant to buy the property insurance on the building, including loss of rent and liability coverage. - Owner: This is a vulnerable point due to loss of control over the type and quality of property and rental income coverage purchased by the Tenant. It is by far be er to have the Tenant pay for the cost of the building and rental income coverage. - Tenant: Review closely the language under the Damage to Premises por on of the lease. The lease may require not just the usual Special Form Coverage at replacement cost, but may include compliance with ordinances or laws, earthquake and flood insurance. 4. Other: Describe Page 5

6 5. Iden fy the Rent Amount 1. Base rent: 2. Maintenance costs pass-through clause? Yes No 3. Is the Tenant responsible to pay % of sales as addi onal rent? Yes No 4. Does the lease contain a Consumer Price Index (CPI) rent adjustment? Yes No % 5. What are comparable rents in the insured neighborhood for similar occupancy and size? 6. Total square footage of property: Square footage of leased property: Square footage of property occupied by Owner: 6. Iden fy if there is a Rent Abatement/Escape Clause 1. Does the lease contain a rent abatement clause? Yes No 2. Does the language use a specific me frame of unoccupancy before the Owner or the Tenant have the right to terminate the lease? Yes No 3. Does the language use a % of damage to demised premises? Yes No 4. Does the language use a % of damage to the building? Yes No Rent Abatement/Escape Clause Exposures / Insurance Solu ons 1. This language is used by either the Owner or the Tenant to terminate the lease. If the building has been severely damaged, many mes the Tenant may need to con nue their business and move elsewhere to do so. - Owner: This clause can impact the con nua on of rental income. Transfer that risk to insurance and buy sufficient Rental Income coverage for the longest possible shut down. In many areas, the building permit approval process can be quite long. Many policies only cover up to one year loss of income. This is o en inadequate. Review this possibly severe loss poten al carefully. Con nued on next page Page 6

7 - Tenant: This is important language that will allow the Tenant to escape from a severely damaged building and reestablish business elsewhere. The lease may include language to the effect that the lease may not stop if the damage was caused by the Tenant. If so, the Tenant s insurance will only pay for the con nuing rent un l the Tenant is permanently reestablished elsewhere. Review this possibly severe loss poten al carefully. Insurance can be purchased by the Tenant for this exposure by using the Legal Liability Coverage Form, providing a high enough limit to cover both direct loss and the rent amount required under the lease (cross-reference back to the beginning of this survey to the lease term por on). 2. Many leases use a certain number of days of unoccupancy before the Owner may cancel the lease with a longer number of days of unoccupancy before the Tenant may cancel the lease. 3. If the language is to demised premises the lease will abate when the damage exceeds the listed percentage to the leased premises (cross-reference back to the beginning of this survey to the descrip on of leased premises). 4. If the language is to the building, the damage may be severe in another por on of the building. - Owner: This will require con nua on of the rent paid by all Tenants un l the damage meets or exceeds the listed percentage. It may be difficult to enforce if the building access is affected and Tenants are un able to use the property for their business. - Tenant: This will require con nua on of the rent payments even if the premises cannot be occupied or used due to damage un l the damage meets or exceeds the stated percentage of damage. This is an unfavorable provision and the language should be reviewed by competent legal counsel for revision prior to signing the lease. 7. Iden fy if there are any Improvements, Altera ons and Addi ons made to the leased premises 1. Are improvements, altera ons and addi ons clearly defined in the lease? Yes No 2. Which party is required to pay for ordinance or law compliance, including ADA? Owner Tenant 3. Did the Tenant pay for the improvements? Yes No Page 7

8 Improvements, Altera ons and Addi ons Exposures / Insurance Solu ons 1. Leases need to clarify whether the improvements made by the tenant that are removable or not removable at the end of the lease. Improvements that must remain with the property a er the end of the lease may be insured by the Tenant as Improvements and Be erments. - Owner: Verify coverage is provided by the Tenant s policy at replacement cost. Include these values in the building insurance carried by the Owner to avoid possible underinsurance. Payment for Improvements made by Owner. Include the replacement value of build-outs in the building coverage. - Tenant: Include the amount paid for improvements in the business personal property coverage limit at replacement cost. If the improvements were paid for by the Owner as build-outs, these cannot be insured as part of the Tenant s personal property policy, but must be covered under the Owner s building insurance. 2. Ordinance or law compliance Improvements and Be erments: - Owner: Include costs of ordinance compliance in the Building coverage. Also include Increased Period of Restora on endorsement in the Owner s Rental Income coverage to pay for the addi onal loss of rents while the building is being brought into code compliance. For example: The loss may be sufficiently severe so that the city building inspector requires that the building be demolished. Ordinance coverage will pay for the demoli on cost as well as the rebuilding costs of the demolished por on and will pay for the costs to bring the building up to code. The Increased Period of Restora on will pay the loss of income during this addi onal shut down me. - Tenant: May be responsible for bringing Improvements up to code, but the property policy will not pay for this under the business personal property coverage. The lease may need to be modified in this area and have competent legal counsel review and revise. Page 8

9 8. Iden fy the Indemnifica on / Waiver of Subroga on clauses in the lease 1. Does the Tenant hold harmless and indemnify Owner? Yes No 2. Does the lease language specifically refer to defense costs? Yes No 3. Does the lease specify the amount required by Tenant for indemnifica on of the Owner? Yes No 4. Is there a waiver of subroga on that is equal between Owner and Tenant? Yes No 5. Is it an insurance waiver only (to the extent of the required or purchased insurance)? Yes No Indemnifica on / Waiver Exposures / Insurance Solu ons 1. Indemnifica on: - Owner: Language should apply to the fullest extent permi ed by law. The Tenant s General Liability and Business Auto policy should include contractual liability coverage. However, the insurance policies will have numerous exclusions, whereas the indemnifica on agreement applies with or without insurance. The risk transfer will be to both the insurance coverage purchased by the Tenant as well as the Tenant s own financial resources. The Owner should have this language reviewed by competent legal counsel. - Tenant: The agreement by the Tenant to pay for the Owner s responsibility for payment of damages to a third party should be restricted to only those losses caused at least in part by the Tenant. This is o en not the case and the language should be reviewed by competent legal counsel. The General Liability and Business Auto coverages purchased by the Tenant will pay damages for the Owner only to the extent the loss is covered in the policy. For example, libel, slander, invasion of privacy coverage does not include contractual liability. The Tenant will be responsible for indemnifica on of Owner directly. 2. The General Liability and Business Auto policies requires that defense costs are specifically listed in the contract as one criteria to pay defense costs in addi on to the limit of liability for the Owner (Indemnitee). If this is not the case, defense costs under the contractual liability will reduce the limit of liability on the Tenant s policy. Con nued on next page Page 9

10 3. Limit of indemnifica on: - Owner: Lease language should not contain a limit on indemnifica on of damages or defense costs - Tenant: Lease language should contain a limit on indemnifica on of damages or defense costs. Rarely does the lease s pulate that the lessee is required to indemnify lessor to the extent of any applicable insurance. 4. Waiver of subroga on may apply to property losses, third party losses or both. Property, General Liability, Business Auto and Umbrella policies typically allow a waiver prior to loss without endorsement. WC policies do not allow waivers and will charge to add. Cross reference to the Exculpatory provision. 5. If the waiver of subroga on Is to the extent of insurance, the lease could s ll obligate the party (o en the Tenant) to be responsible for deduc bles, coinsurance penal es, underinsurance, self-insurance, reten ons. 9. Iden fy if there is an Exculpatory Provision in the lease 1. Does the lease include exculpatory language? Yes No NOTE: This can be a separate paragraph or included in the indemnity agreement. Exculpatory Exposures / Insurance Solu ons 1. An exculpatory clause is quite common in premises leases. Unlike the indemnity clause which addresses loss, injury or damage to third par es, this clause removes all responsibility from Owner for loss or damage to Tenant, including loss of income or injury to Owner, employees or other third par es. - Owner: Favorable language - Tenant: Unfavorable language. This needs to be reviewed thoroughly with legal counsel for possible removal or limita on. 10. Insurance General Ques ons 1. Does the lease specify that any insurance by either Owner or Tenant be placed with admi ed insurance companies? Yes No 2. Does the lease specify AM Best ra ng for any insurance company? Yes No Con nued on next page Page 10

11 3. What is the AM Best Ra ng that is required? 4. Does the lease specify the par es that must be named on insurance and which policies? Yes No If Yes, iden fy: 5. Are coverage documents required, such as Cer ficates of Liability Insurance or Evidence of Property Insurance? Yes No 6. Any edi on dates specified on the Cer ficate Requirement? Yes No 7. What is the edi on date that is specified? 8. Does the lease require no ce of cancella on or non-renewal to be sent to the Owner? Yes No 9. Does the lease s pulate the par es to be named on any claim check from insurance proceeds? Yes No 11. Insurance General Ques ons Exposures / Insurance Solu ons 1. Match insurance to requirements. 2. Named Par es: - Owner: Name Owner and any owner property management company on property and liability policy. Require Addi onal Insured endorsement on the Tenant general liability policy. - Tenant: Name all en es on property and liability policies. 3. Provide Evidence of Property Insurance and/or Cer ficates of Liability Insurance as required. 4. No ce of cancella on: - Owner: Tenant s insurance company will not revise the policies to send no ce of cancella on to Owner. The obliga on should be placed upon the Tenant within the lease language. Review with competent legal counsel for this revision. Con nued on next page Page 11

12 - Tenant: The insurance policies purchased by the Tenant will not provide no ce of cancella on to the Owner, even when Owner is added as Addi onal Insured. This requirement should be revised. Review with competent legal counsel for this revision. 5. Owner should receive all policy proceeds for damage to the building or loss of rents insurance. This is a concern when the lease is wri en as a triple-net lease. This can be solved by having the building and rental income insurance wri en with the Owner as Named Insured. When the property policy is provided by the Tenant and the Tenant is the Named Insured, the property policy must be endorsed with Addi onal Insured endorsement that changes the payee to the Owner. 12. Property Insurance Requirements 1. Does the lease specify the type of property insurance that the Owner must provide? Yes No 2. Does the lease specify the type of property insurance that the Tenant must provide? Yes No 3. Does the lease specify an amount of insurance, perils, valua on, deduc ble, coinsurance or agreed value on the property? Yes No 4. Does the lease specify the party required to purchase insurance on the building? Yes No 5. Does the lease specify the party responsible for maintenance of electrical, plumbing, hea ng, air condi oning equipment? Owner Tenant 6. Is the rent amount favorable to the Tenant? Yes No 7. Does the lease refer to a bonus payment paid by Tenant? Yes No 8. Does the lease refer to pre-paid rent by the Tenant? Yes No Page 12

13 Property Insurance Requirements Exposures / Insurance Solu ons 1. Type of property insurance required for the Owner: - Owner: The lease should specify that the Tenant carry property insurance in an amount sufficient to pay to replace improvements, stock and other business property as well as loss of business income. This will protect the financial statement of the Tenant and enable them to con nue as a Tenant. It is also important to trigger the waiver of subroga on provision in the lease. 2. Type of property insurance required for the Tenant: - Tenant: The lease should specify that the Owner carry property insurance in an amount sufficient to pay to replace the building. This will assist in ge ng the building rebuilt quickly to enable re-occupancy of the building by the Tenant. It is also important to trigger the waiver of subroga on provision in the lease 3. Use the lease requirements as minimum (not maximum) standards to meet when evalua ng and placing property and liability insurance for both Owner and Tenant. 4. If the lease is a triple-net lease, careful review of the property insurance requirements should be made to verify that the lease language incorporates all coverage that the Owner desires, such as Special Form, Equipment Breakdown, Ordinance or Law, Earthquake or Flood all at replacement cost value. Specify that all loss to the building is to be payable solely to the building Owner and that Owner will be added as Addi onal Insured Building Owner to the property policies. 5. Equipment Breakdown insurance will help if actual damage check lease language for lessee requirements to provide a service contract. This is not insurance and lessee will have to obtain separately. Include values accordingly in the EB coverages. 6. If the lease specifies any pre-paid rent, security deposits, the rent amount is favorable to the Tenant or substan al improvements have been paid for by the Tenant, these investments can be covered by Leasehold Interest insurance wri en for the Tenant. 13. Liability Insurance Requirements 1. Does the lease specify that liability insurance is to be carried by: Owner Tenant 2. What are the limits specified? Con nued on next page Page 13

14 3. Does the lease require specific limits of liability be carried by? Owner Tenant 4. What are the limits specified? 5. Does the lease contain any language regarding deduc bles or reten ons? Yes No 6. What are the deduc bles or reten ons required? 7. Does the lease require that Owner is added as Addi onal Insured to the Tenant s liability insurance? Yes No Liability Insurance Requirements Exposures / Insurance Solu ons 1. Liability insurance: - Owner: Verify requirements for general liability insurance, business auto insurance, workers compensa on insurance and umbrella or excess liability insurance. It may be desired to endorse the liability policies to change the Other Insurance provision so that the Owner s insurance is excess over other insurance available. - Tenant: Verify requirements for general liability insurance, business auto insurance, workers compensa on insurance and umbrella or excess liability insurance. It may be necessary to endorse the liability policies to change the Other Insurance provision so that the Tenant s insurance is primary for the Addi onal Insured Owner. 2. If yes, use limits required as minimum coverages for Owner or Tenant. Check for types of insurance required, such as General Liability, Business Auto, Workers Compensa on, Pollu on Liability. 3. Tenant s policy language on the deduc ble or reten on endorsement should specify that the Named Insured has the responsibility to pay the deduc ble or reten on. 4. Check for type of policies, any specific endorsement, such as blanket addi onal insured. Final notes: If your insured does not want to provide a copy of their lease, send confirma on in wri ng. If your insured only provides the insurance sec on of the lease, document that in wri ng to the insured and keep the copies as received and reviewed for insurance and risk. Always advise the insured to no fy you prior to signing the lease. Review any concerns with the insured and with their a orney. Never give legal advice. Page 14