Presenting a live 90-minute webinar with interactive Q&A. Today s faculty features:

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1 Presenting a live 90-minute webinar with interactive Q&A Property and Liability Insurance in Commercial Leases: Key Provisions and Coverage Issues Additional Insured and Loss Payee Clauses; Interplay With Indemnity Provisions WEDNESDAY, DECEMBER 6, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Susan Drake-Patelson, CPCU, RPLU, ASLI, Area Executive Vice President, Arthur J. Gallagher & Co., Los Angeles Brad A. Molotsky, Partner, Duane Morris, Cherry Hill, N.J. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions ed to registrants for additional information. If you have any questions, please contact Customer Service at ext. 10.

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5 5 Property & Liability Insurance in Commercial Leases Key Provisions and Coverage Issues Q Additional Insured and Loss Payee Clauses; Interplay With Indemnity Provisions

6 Topics for Discussion Intro Interrelation between property & liability coverages Liability Insurance Certificates of Insurance Matching indemnity and casualty restoration obligations with Insurance 6

7 Key Concepts Insurance: A contractual relationship that exists when one party (the insurer) for a consideration (the premium) agrees to reimburse another party (the insured) for loss to a specified subject (the risk) caused by designated contingencies (hazards or perils). First-Party Coverage: Insurance applying to the Insured s own property or person. Examples: Automobile Physical Damage and Property. Third-Party Coverage: Insurance covering the legal liability of one party to another party. Examples: Commercial General Liability, Automobile and Errors & Omissions. 7

8 Insurance Coverages 8

9 Casualty Insurance Coverages General Liability protection against claims brought by 3 rd parties. Bodily Injury slip & fall Property Damage damage to vehicles in parking lot Personal Injury wrongful eviction Limits how do they work? Per Occurrence the most the policy will pay for any one claim Aggregate the most the policy will pay regardless of the # of occurrences during the policy period. Who needs this? Owners, Tenants, Vendors, and Contractors Protects owners from claims brought by 3 rd parties due to owner s negligence. What happens in the tenant s space is the tenant s responsibility. Owner should not be responsible for claims brought about by their operations. Vendors and contractors performing work at your assets should protect Owner from third party claims from their operations. 9

10 Casualty Insurance Coverages Automobile Typical limits - $1M Combined Single Limit (CSL) Non-Owned versus Owned Vehicles Owned vehicles = fleet or company cars Non-Owned vehicles are vehicles that employees own and drive on company business. Who needs this? Owner (Owner), Tenants, Vendors, and Contractors Loading Dock Damage, Parking Lot Accidents 10

11 Casualty Coverages Continued Workers Compensation & Employers Liability WC protects employees from on-the-job injuries. Limits are statutory EL protects the employer in the case of gross negligence on the employer s part. Common limits are $1M Who needs this? EVERYONE it is compulsory in most states Sole proprietors are not required to carry Workers Compensation 11

12 Casualty Coverages Continued Umbrella/Excess Increases the General Liability Limits, the Automobile Limits, and the Employers Liability limits on the WC policy. Used to meet limit requirements in contracts. Rising claim costs $6M plumbing incident $20M slip & fall $51M scaffolding accident $30M judgment for hiring a contractor w/o WC. 12

13 Property Insurance First Party Coverage Direct Physical Loss or Damage to covered property by a covered peril Perils/Causes of Loss: All Risk or Special Form" Earthquake & Flood are add-on coverages Covers the interest of contractors, subcontractors of every tier (if required by contract) Buildings Rental Income Personal Property (Yours) 13

14 Tenant, Vendor and Construction Requirements Required Coverages Commercial General Liability Primary & Non Contributory Additional Insured Status for Owner Automobile Liability Workers Compensation & Employer s Liability Vendors and Contractors Waiver of Subrogation should apply Umbrella / Excess Liability (Over GL, Auto and EL) Recommended limits of GCs for Cap X & TI $5M Liability. Rexford should be additional insured for on-going and completed operations. GC s insurance should be primary & non contributory to that of owner. $5M Automobile (at the least hired & non-owned) Workers Compensation & Employers Liability with a waiver of subrogation 14

15 Tenant, Vendor and Construction Requirements Required Coverages Continued Property Professional Liability If a Professional Services Firm Additional Insured AM Best Rating (For Example, A- VII) Letter for financial strength Number for size Do Tenants Hire Contractors? How is Owner protected? May want to amend lease agreement to require all tenant contractors name Owner as additional insured. Any tenant contractor should have Workers Compensation. The lease language will dictate that the tenant indemnify and defend Owner for actions of their invitees. 15

16 Property All Risk Personal Property & Business Interruption Tenant s Personal Property, Furniture & Equipment Tenant s Improvements and Betterments TIB Business Interruption & Extra Expense Mutual Wavier of Subrogation 16

17 Waiver of Subrogation The CGL policy covers bodily injury and property damage from an insured contract. An insured contract is that part of any other contract or agreement pertaining to your business under which you assume tort liability of another party to pay for bodily injury or property damage to a third person or organization. i.e. Insured Contract = contract between Property Owner and vendor/contractor 17

18 Waiver of Subrogation Cont. Under the section Transfer of Rights of Recover Against Others to Us in the CGL policy it states: If the Insured has rights to recover all or part of any payment we have made under this Coverage Part, those rights are transferred to us. KEY WORD: IF If you don t have the right it can t be transferred. Property Insurance mutual waiver between tenant and landlord 18

19 What is a Certificate of Insurance? A Certificate of Insurance is: A Document to provide evidence that appropriate insurance exists. Who purchased the insurance. When the insurance is effective. What carriers provide the insurance. How much insurance has been purchased. Who is an additional insured. A Certificate is NOT: Part of the policy. A contract between the certificate holder and the insurance company. A change to any of the actual terms/conditions of the policies. 19

20 Sample Liability Certificate Who needs liability certificates? Building Owners want assurance that their tenants and vendors have liability insurance. A building owner does not want to pay for a claim where the building owner is sued because of damages to someone who fell on the premises due to tenant or vendor negligence. 20

21 Sample Property Certificate Evidence of Property (EOP) Covers business personal property desks, computers, tenant improvements, etc. Covers business interruption Always a separate certificate from liability certificates 21

22 Cancellation Language - Certificates Cancellation Language ISO AI endorsements do not amend the policy provisions Should any of the above described policies be cancelled before the expiration date of the policy thereof, notice will be delivered in accordance with the policy provisions. First Named Insured ONLY receive company generated notices Other requests non-renewal or material change are not extended to AIs State Statues dictate the number of days notice 22

23 Additional Insured Endorsements Why obtain a copy? Tenants not necessary to obtain a copy. Documentation on certificate is sufficient. Contractors and Vendors performing work. Not all additional insured endorsements are equal. Owner wants to ensure that there is NOT an exclusion for additional insured status for owner once the work is complete. The endorsement changes the policy. This is verification that the correct endorsement has been attached. 23

24 Additional Insured Endorsements CG This is required of those performing WORK at the asset. Provides additional insured status for on-going operations as well as completed operations. May be told this endorsement does not exist. What is acceptable? Carrier manuscript endorsements that do not provide exclusions for completed operations. Combination of two additional insured endorsements. One endorsement will provide additional insured status for on-going operations. (Can be Carrier Specific or ISO CG 20 10) One endorsement will provide additional insured status for completed operations. (Can be Carrier Specific or ISO CG 20 37) 24

25 Additional Insured By Written Contract Is this acceptable? YES IF: There is a contract between Owner and the Insured on the certificate. 25

26 In a Commercial Lease Context - Who Typically Insures What? A. Landlord/Tenant - The property owner/landlord typically insures the building for both property and liability exposures, and the tenant typically insures its own Business Personal Property and obtains its own liability coverage. B. Tenant Improvements - the Tenant is also frequently required to insure any Tenants Improvements (TI) per the terms of the lease but watch for the T/I Allowance and where it goes Permanent additions or changes made to a building by the tenant at its own expense that may not legally be removed. 26

27 In a Commercial Lease Context - Who Typically Insures What? C. Business Interruption - Tenant may also be required to carry Business Interruption / Business Income coverage. This is a commercial property coverage covering loss of income suffered by a business when damage to its premises by a covered cause of loss causes a slowdown or suspension of its operations. 1. Issue who determines amount of income and how; 2. What if tenant damages space below it, but not its own space? 3. How much to require? 4. Is Landlord insuring rental stream and if so, is tenant paying if so, why cover this 2x? 27

28 In a Commercial Lease Context - Who Typically Insures What? D. Combined Coverage - For smaller businesses, these coverages can be combined in a package policy (the Business Owners Policy). E. Interplay between coverage, indemnity and termination - Insurance requirements work in conjunction with indemnification and casualty clauses in the lease. 28

29 Additional Insureds A. An entity that is included or added as an insured under the policy at the request of the named insured. Usually must be added by endorsement to the policy. The carrier will require that the additional insured have an insurable interest. 1. Note how often is this actually provided or followed up on by the party asking? B. Cost - In some policies there is a charge for adding additional insureds, but in many, there is no charge for this but you must ask. C. Sharing Limits - Client should understand that putting additional insureds on the policy means that it is sharing its policy limits with the additional insured. May wish to consider increasing limits. D. Landlord Protection - This is a way for the landlord to back up the tenant s promise of indemnification. 29

30 Waiver of Subrogation A. Subrogation the insurer assumes the rights of the insured to recover for a loss from another party that is liable for the loss. Can be by operation of policy terms or by law. B. Waiver of subrogation agreement by which one party agrees to waive subrogation rights against another if a loss occurs; intended to prevent one party s insurer from subrogating against the other party. 1. Note sometimes the waiver may be written to apply only to extent of insurance recovery. C. Unilateral vs. mutual waivers note what is fair, reasonable, rational? D. Cost - Insurance company may add waiver of subrogation by endorsement to the policy; may or may not charge for adding it. E. May be a hidden cost for tenant if property loss caused by leaking pipes in building, for example, and the insurer cannot subrogate against the landlord, this may/will likely affect the tenant s claims history more negatively (i.e., potential for non-renewal or premium increase). 30

31 Waiver of Subrogation F. LEASE CLAUSE - Anything in this Lease to the contrary notwithstanding, Landlord and Tenant each hereby waives any and all rights of recovery, claim, action or cause of action against the other for any loss or damage that may occur to the Premises or any improvements thereto, or any personal property of Landlord or Tenant, arising from any cause that (a) would be insured against under the terms of any property insurance required to be carried hereunder; or (b) is insured against under the terms of any property insurance actually carried, regardless of whether the same is required hereunder. The foregoing waiver shall apply regardless of the cause or origin of such claim, including but not limited to the negligence of a party, or such party's agents, officers, employees or contractors. The foregoing waiver shall not apply if it would have the effect, but only to the extent of such effect, of invalidating any insurance coverage of Landlord or Tenant. Note - older form leases may require a party to obtain an endorsement to the property insurance policy effectuating the waiver of subrogation, but this is no longer necessary. It is entirely appropriate for the waiver of subrogation to be mutual, since it is readily available at little or no cost. 31

32 Other Considerations Limits of Liability Insurance 1. Combined single limit vs. split limits More common to now see combined single limit e.g. $5,000,000. This is the amount available for any one occurrence and for the policy period. Split limits show a limit per occurrence and in the aggregate for the policy term. 2. May be met through combination of underlying coverage and an umbrella liability policy 32

33 Other Considerations A. Insurance Carriers 1. Admitted vs. Non-Admitted Carriers 2. Financial Stability Ratings AM Best, e.g. 3. Acceptable/reasonably acceptable to Landlord B. Occurrence basis vs. claims-made basis 1. Some leases specifically require that liability coverage be written on an occurrence basis. Almost all liability insurance is written on an occurrence basis. 2. Occurrence policies covers claims that arise out of damage or injury that took place during the policy period, regardless of when claims are made. 3. Claims-made policies cover claims that are first made against the insured during the period in which the policy is in force. 33

34 Other Considerations C. Covered Causes of Loss 1. All Risk / Special Form all causes of loss covered unless they are excluded in the policy 2. Named Peril Coverage coverage only for causes of loss listed in policy. A. Basic causes of loss form coverage for the perils of fire, lightning, explosion, smoke, windstorm, hail, riot, civil commotion, aircraft, vehicles, vandalism, sprinkler leakage, sinkhole collapse, volcanic action B. Broad causes of loss form basic plus these additional perils: falling objects; weight of snow, ice, or sleet; water damage (in the form of leakage from appliances); and collapse from specified causes. Insure for replacement cost (as opposed to value) when possible. 34

35 Other Considerations D. Request for 30-day Notice of Cancellation to Landlord: 1. Liability - In most liability insurance policies, the insurer agrees to notify only the first named insured of cancellation. Policy may also contain notice provision for mortgagee. 2. Property - In most property insurance policies, the insurer agrees to notify the mortgage holder of cancellation. 3. Anyone Else - Generally no one else is required to be notified (including a landlord) unless the policy is endorsed to this effect, if the insurance company will do this. 4. By Endorsement - Some insurers won t endorse a policy to provide notice to all parties that might be requested. Substitute course might be to negotiate requirement that if either party s insurance is cancelled, that party must inform the other party within a specified number of days. 35

36 Other Considerations 5. Request for 30-day Notice of Cancellation to Landlord: ACORD changes effective September 2010 changed the cancellation text on the pre-printed form. Old Version New Version 36

37 Acord Certificates A. Disclaimer at the top of the ACORD 25: A. Also: 37

38 Resources A. IRMI.com Insurance Glossary B. To check on the latest ACORD form versions C. ambest.com/ratings/entities/search to search insurance carrier financial strength ratings D. dfs.ny.gov/insurance/insurers/cert_ins_approved list of certificate forms approved by the NY Division of Financial Services 38

39 Terminology A. Accord 25 - Certificate of Liability Insurance (ACORD 25) B. Acord 28 - Evidence of Commercial Property Insurance (ACORD 28) C. ACORD Association for Cooperative Operations Research and Development non-profit organization that creates standardized forms for the insurance industry. D. Limit - the maximum amount the insurance company will pay on a claim. E. Deductible - the amount of loss the insured must pay before the insurance coverage begins. By increasing a deductible an insured can reduce the insurance premium. In a lease where the cost of insurance is passed through to the tenant, query whether it is appropriate for the landlord to pass through the deductible if there is a loss, as long as the deductible is reasonable. The deductible inures to the benefit of the tenant by reducing the insurance premium. F. Blanket Policy - When an insured own multiple properties, a blanket coverage insures all of them under one policy. 39

40 Terminology G. Umbrella Coverage - Umbrella coverage is excess liability coverage. For instance, a party might purchase primary liability coverage with a limit of $2,000,000, but an additional umbrella policy for the next $10,000,000 of loss. Since the umbrella carrier knows that the first $2,000,000 of any loss will be borne by the primary liability carrier (in essence, a very high deductible), umbrella policies have significantly lower premiums than primary policies. Often the underwriter of the umbrella coverage will not have the same rating as the primary carrier, so one should be careful of language in the lease requiring the insurer to have a minimum rating. H. A. M. Best Rating - A.M. Best rates the overall financial stability and management of an insurance carrier using letters (A, B or C, plus or minus), and the carrier's net worth using roman numerals (XV to I). Generally a safe bet is an insurer with a rating of A-, X or higher. 40

41 Terminology I. "Named Insured." The named insured is the party that pays the premium for the property or liability policy. The insurance company underwrites the policy and the premium based on the claims history and risk posed by the named insured. Subsidiaries of the named insured may be added as "additional named insureds." It is not appropriate for a lease to require the landlord or the tenant to be a "named insured" or "additional named insured" on the other's policy. J. Additional Insured - The landlord or the tenant can be added to the other's property policy as an "additional insured" or "loss payee." The added party can only recover if it has an insurable interest in the property of the insured. For instance, in the case of a ground lease, the landlord has an insurable interest in the building erected by the tenant, since it will revert to the landlord at the expiration of the lease. On the other hand, if a tenant in turn key space carried property insurance on its movable trade fixtures, the landlord would have very little, if any, insurable interest under the tenant's property insurance on the trade fixtures. 41

42 Terminology K. The landlord or the tenant can be added to the other's liability policy in as an "additional insured." The landlord or the tenant can be added to the other's property or liability policy as an additional insured only by an endorsement. When a party is added as an additional insured the negligent actions of the insured party will not defeat coverage of the additional insured under the policy. The additional insured has the independent right (regardless of the actions of the primary insured) to a defense under the insured's policy, which can supplement the indirect indemnification provisions under the lease. Further, if the lease does not contain a waiver of subrogation, being added as an additional insured prevents the insurance company from pursuing the additional insured for losses that it may have caused. If the additional party requires an endorsement making the insured's policy the "primary coverage", the insured's policy will pay any claims and must be exhausted prior to any claims under the liability policy carried by the additional insured. L. The landlord or the tenant can be added to the other's property policy as a loss payee, which results in a mutual claim to the insurance proceeds. Being a loss payee is not as desirable as being an additional insured because the loss payee is subject to all defenses the insurer may have against the primary insured, and is only entitled to the insurance proceeds if the primary insured decides to pursue a claim. 42

43 Forms/Types of Coverage A. Two basic types of insurance that impact leases: property insurance and liability insurance. B. ISO - Most policies are written on Insurance Services Offices ("ISO") forms, although special coverages can be negotiated and underwritten. C. Property Insurance 1. Property Insurance - Property Insurance generally covers loss arising from damage to real or personal property owned by the insured. The typical example would be a fire, where the building owner's property insurance policy would pay to repair the damage. Leases often contain the misnomer "casualty insurance" when property insurance is intended. 43

44 Forms/Types of Coverage C. Property Insurance 2. Casualty - "casualty insurance" means liability insurance, which is discussed below. Property insurance can be written in several forms of ever-broader coverage, the three most basic of which are as follows: a) Basic Form The ISO "Basic Form" covers the following specified causes of loss: Fire Lightning Explosion Smoke Windstorm Hail Riot Civil Commotion Aircraft Vehicles Vandalism Sprinkler Leakage Sinkhole Collapse Volcano Eruption Note - leases that call for "fire and extended coverage," policies are referring to this type of coverage. If the loss is caused by a peril that does not appear on the foregoing list, the policy does not cover the loss. Fire and extended coverage insurance is not as comprehensive as the other types of coverage 44 discussed below, and is not currently industry standard for leases.

45 Forms/Types of Coverage b) Broad Form The ISO "Broad Form" policy covers five causes of loss in addition to the perils insured under the Basic Form: glass breakage, falling objects, weight of snow, ice, or sleet, water damage (for sudden leaks but not seepage), and collapse from certain, specified causes. This form is also not industry standard for leases c) Special Form Unlike the Basic Form and Broad Form policies, which only cover specific perils, the ISO "Special Form" policy takes a different approach, covering losses from all causes unless they are specifically excluded. Most appropriately referred to as "Causes of Loss-Special Form" this is the standard property insurance landlords and tenants should expect. 45

46 Forms/Types of Coverage Note: When a lease refers to "all risk" coverage, it is using an outdated term for this type of coverage. The specified exclusions from Special Form coverage are the following perils: Ordinance or Law Earth Movement Governmental Action Nuclear Hazard Utility Services War and Military Action Water (flood, surface water, waves, tides, mudslide or mudflow, sewer, drain or sump backup, underground water) Boiler and Machinery Failure Wear and Tear or Lack of Maintenance Continuous Seepage or Leakage Dishonest Acts Pollutants Faculty Design or Workmanship Note: Many of these perils can be covered by supplemental policies, such as ordinance or law coverage (which covers extra costs incurred to meet current codes), earthquake, flood, boiler and machinery, and environmental insurance policies. 46

47 Amount of Coverage A. Often leases will require a party to carry property insurance at "full replacement cost", which means that the policy will pay the full cost of replacing the damaged property, with certain limitations (e.g., if the property cannot be restored to its former condition due to a change in law, the added costs would not be covered unless there was also ordinance and law coverage). In order to receive full replacement cost coverage, the property must be restored. If, instead, the property is demolished and not replaced, the insured can only recover the actual cash value. B. "Actual cash value" is generally the value of the property at the time of the loss, determined based on the replacement cost, less depreciation, calculated over the useful life of the property. 47

48 Amount of Coverage C. Co-Insurance - If a lease does not require full replacement cost coverage, it should at least require the insuring party to carry sufficient property insurance to avoid "coinsurance." Normally, in the event of partial damage, after the insured pays the deductible, an insurance policy will cover the balance of the loss. However, if the insured carries too little insurance, e.g., less than 80% or 90% (depending on the policy) of the value of the insured property, and there is a partial loss, the insurance company will require the insured to participate in paying for the restoration. This is co-insurance. By way of example, suppose there is a loss of $5,000 to a $100,000 property. The policy has a $1,000 deductible, but the insured only carried insurance with a limit of $50,000 (50% coinsurance). The insured will pay the $1,000 deductible, plus 50% of the $4,000 balance of the loss ($2,000), for a total of $3,000. If the insured had instead carried full replacement cost insurance, he would only pay the $1,000 deductible. 48

49 Amount of Coverage D. Liability Insurance. 1. Items of Coverage a) Liability policies cover bodily injury and property damage to third parties. b) The industry standard form for leases is known as "Commercial General Liability" Coverage, often referred to as the "CGL". c) CGL - Older lease forms often refer to "Comprehensive General Liability", but the ISO replaced this with CGL in CGL covers liability claims arising out of: Premises and operations Products and completed operations Advertising and personal injury Contractual liability (assumption of liability under an "insured contract", which includes a lease) d) CGL generally covers bodily injury and property damage occurring as the result of the negligence of the insured. The contractual liability coverage extends to the indemnity section of the lease and provides coverage for the assumed liability for bodily injury and property damage. It is no longer necessary to require a "contractual liability endorsement," which older lease forms often require. 49

50 Amount of Coverage D. Liability Insurance. 2. Coverage Period a) Liability policies only cover losses during a specified period of coverage. They may be written either on an "occurrence" or "claims made" basis. b) "Occurrence" policies cover incidents that occur during the policy period, even if the claim is filed after the policy expires. c) "Claims made" policies cover claims filed while the policy is in force for any incidents that occurred during the policy period. Thus if an accident happens on the last day of the policy period and the claim is filed a week later, the loss would not be covered. To avoid this harsh result, claims-made policyholders usually purchase "nose" coverage, which extends a claims-made policy back to a specified date prior to the current policy, or "tail" coverage, which provides an extended reporting period for incidents that occurred during the policy period but which were not reported until after the policy period. 50

51 Amount of Coverage D. Liability Insurance. 3. Limits of Coverage a) Combined Single Limit - CGL policies are now written with a "combined single limit" per occurrence for bodily injury and property damage. Note - Older policies used to distinguish between bodily injury and property damage, e.g., "$3,000,000 with respect to bodily injury or death, and $500,000 with respect to property damage." If this language is in a lease, it is no longer correct. A properly worded lease would now require the insured to carry "$3,000,000 combined single limit per occurrence. Portions of this presentation utilized: (i) an online publication from Bradley and (ii) materials prepared by Kathleen Sellers, JD, CLU. 51

52 Thank You Susan Drake-Patelson Arthur J. Gallagher & Co. Brad A. Molotsky Duane Morris 52