By: Edward L. Blais, JD, CIC, CPIA
There are many risks to being a commercial landlord, and one major risk can arise if you leave insurance coverage up to your tenant. Landlords should consider it a best practice to hold the insurance coverage and for the tenant to pay the premium directly to the owner.
When leasing a property, it is common for landlords to place the responsibility of obtaining their own insurance coverage on their tenants. This approach may seem convenient, but it can lead to problems and potential risks.
1. Lack of Coverage Awareness
Tenants may not fully grasp the level of coverage needed to protect themselves and the landlord in the case of unforeseen events. This may result in the tenant buying insufficient insurance policies that leave both parties vulnerable to financial loss.
2. Insufficient Liability Protection
Without the owner’s participation in specifying the required liability limits, tenants may opt for minimal coverage that does not appropriately protect against potential lawsuits or claims, exposing both parties to severe financial risk.
3. Policy Cancellations and Lapses
A canceled policy is canceled for everyone – no matter what interest they have. Insurance policies can be canceled or allowed to lapse due to various reasons such as non-payment, changes in circumstances, or negligence on the part of the tenant. If the tenant stops or forgets to pay the insurance, the owner is out of luck, open to significant potential liabilities.
4. Inadequate Property Coverage
Property damage is a common risk faced by landlords. When tenants are solely responsible for insurance, there is a risk of insufficient coverage to protect the property adequately under the terms of the lease. Tenants may overlook essential elements of coverage, such as replacement cost, or underestimate the value of their belongings. As a result, the landlord may face difficulty in recovering losses in the event of damage or destruction.
Leaving insurance up to the tenant is a serious risk for property owners. What happens in the event of tenant negligence? Without coverage, the building owner can be sued for anything that happens on the property.
Securing Insurance coverage for the property, including business interruption, lessors risk liability, and other relevant coverages, while billing the cost back to the tenant, is the safest approach for landlords. This way, the property owner retains control of the rebuild and loss adjustment process in the event of a loss. Meanwhile, the tenant is responsible for insuring their own property, boiler and machinery, business interruption, and liability risks. At the very minimum, landlords should mitigate risk by requiring the tenant to provide annual proof that they are maintaining insurance.