Signed commercial leases are often the result of a significant amount of negotiation between multiple parties, including the landlords, brokers, tenants, and their attorneys. The goal of each party in this type of negotiation is to pass on as much liability and responsibility for the property as possible to the other party. Of course, it’s virtually impossible for all parties to eliminate all risk. At this point during the negotiation, the subjects of insurance coverages and clauses typically arise. The amount and type of insurance required as part of the clause in a commercial lease will depend upon the type of lease that’s involved. For this reason, it’s extremely important for both property owners and tenants to understand exactly which type of lease is involved in the relevant negotiations.
Different Types of Leases and What They Mean for Insurance Coverage
Two types of commercial leases exist. There are “gross leases” and “net leases.” In a gross lease, the landlord is responsible for paying the taxes, maintenance and insurance for the subject property. In modified gross leases, tenants are typically responsible for at least some of the insurance coverage.
Different Types of Commercial Property Insurance
It is also important to understand that two types of commercial property insurance exist. One type is a called a “peril policy.” In this type of policy, only specific perils listed in the policy are covered. By comparison, in an all risk policy, all perils with the exception of those that are specifically excluded in the policy are covered. Common exclusions used in an all risk policy include the following:
- Water damage
- Earth movement
- Governmental destruction or seizure of property
- Mechanical breakdown
- Wear and tear
- Off-premise utility service interruption
- Building ordinance
- Vapor, smoke, or gas from industrial or agricultural operations
- Theft of building supplies or materials not attached to the building
- Dryness, dampness, or changes due to temperature extremes
- Snow, ice, sleet or rain damage
- Boiler expansion
Depending upon the type of lease, public liability insurance, sometimes referred to as commercial liability insurance or even CGL insurance, may also be required. This type of insurance policy provides coverage for property damage or bodily injury that occurs due to alleged negligence of the insured.
Determining the appropriate level of and type of insurance coverage required as part of a commercial lease is typically the result of negotiation and can significantly impact the responsibilities of the tenant and the landlord. Whether your role is that of a property owner or a tenant, it is important to analyze the clauses contained within the lease carefully to determine the scope of your responsibility and make sure that you’re completely covered.
If you’re still in the process of searching for commercial property insurance, Evergreen Insurance is available to assist you in understanding the various options available and determining the appropriate level of coverage for your lease requirements. Contact one of our representatives today to learn more about available options.