General Liability Insurance

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Nearly all agreements which involve the use of real property require liability insurance in one form or another. Once we get through the general terms of use, most of the questions I receive come in the area of insurance. Insurance requirements are often the most misunderstood and over-looked areas of real property. What follows is a simplified explanation intended to answer to most-often asked questions relating to real property.

Insurance Requirements:

The simple truth is that requiring a tenant or other user of your property to have insurance serves the primary purpose of protecting the property owner. As an example, without tenant insurance for damage to the rented premises done by the tenant, the property owner would be responsible for not only the repairs, but the cost of those repairs as well. However, more important than the insurance itself is a well written agreement between the parties, including details with all the insurance requirements. Not just for the tenant, but for the property owner and their policy as well.

Basic Types of Policies:

There are basically two broad categories of insurance coverage. Liability coverage which is designed to protect the insured party from claims arising from personal injuries caused by them or damage to third party personal property, also caused by them; and casualty insurance which protects the property owner for physical damages caused to the real property.

  • General Liability Insurance: A basic policy which is intended to protect an organization for injuries and third party personal property damage arising from the use of real property, as a result of the property owner’s negligence.
  • Property (Buildings/Improvements) Insurance: Similar to Homeowner’s Insurance, in that it is a policy used to reimburse the owner for damage caused to the property/building, or theft of personal property.
  • Workers’ Compensation Insurance: Required in California as a means to provide for an employee’s medical bills, missed wages, and cost of recovery when injured on the job, while on the property.
  • Business Interruption Insurance: A policy designed to replace lost revenue suffered by a business under certain circumstances, such as a natural disaster.

Insurance Coverage:

The most important items regarding ones insurance coverage is often the amount of financial coverage a policy has, and/or possibly more appropriately, what the policy doesn’t cover. A lease agreement should require the tenant to have a policy which covers the owners building and improvements at their full replacement value. In other words, the insurance company doesn’t pay the depreciated value of the buildings, but rather the cover to repair or replace the damage as if it never occurred. Although there will always be conditions which may be limiting factors such as changes in the building codes, the property would generally be restored.Notwithstanding, full replacement value limits may not always cover today’s values needed in the basic tenant property insurance.  Then,what is commonly known as an Umbrella Policy, is used to make up the difference.In addition, the agreement between the parties should minimally require the annual review of the full replacement value as well as any necessary increased adjustments that may be necessary.

Along these same lines are that of actual cash value which often comes into play when the building will be demolished and not rebuilt. In this instance, the insurance carrier will generally take the full replacement value and deduct for depreciation.

Often times, an insured party may also obtain an umbrella policy as additional or extra liability insurance. These types of policies are used to cover claims which are above the coverage limits of the tenants, or landlord’s primary policy. Think of it as an additional layer of protection in case things get out of hand.

Waiver of Subrogation:

To subrogate means to “step into the shoes of another”, or a substitution/transfer of associated rights and duties against another. Generally speaking, an insurance provider will not subrogate against a negligent party, but rather to that of its own insured party.

By way of example, if your tenant’s negligent act causes damage to your property, at no fault of yours, that damage will need to be repaired. Should your insurance provider pay to have the damage repaired, under your policy, they will become subrogated to you. As such, they can then step into your shoes and recover from your tenant or their insurance carrier,including filing a lawsuit to recover.

A waiver of subrogation is intended to minimize the potential for litigation. This is because such a waiver prevents the insurance provider from stepping into your shoes to recover against you, from your negligent tenant. As a result, some insurance carriers will include language in their policies which prevent the insured party from taking any actions which would limit their right of subrogation.

A well written agreement with a tenant should provide that the parties waive their respective rights to recover,  claim, or cause of action against the other for any loss or damage that may occur to the property, its improvements, or  personal property arising from any cause that would be insured against by the property insurance required in the agreement.

When in doubt, bring the waiver to the attention to your insurance provider and see how they would like to handle the matter. Chances are the insurance carrier will enter into an endorsement allowing for the waiver of subrogation.  But that choice is theirs to make, and should be considered before agreeing to waive their right or subrogation.

Indemnity.

The intent behind an indemnity provision, or hold-harmless, in rental agreement is to make the injured party whole again for a loss incurred as a result of the tenant. That loss of the landlord may include attorney’s fees, litigation cost, and actual damages incurred. To indemnify the property owner is to relieve them from responsibility for damage or loss arising from a tenant’s action, or lack thereof.  Think of it as not being held liable for a harm suffered by shifting the liability to another.

The idea is to allocate the liability for personal injury or property damage that may arise from the tenant’s use or operations on the property.  Additionally, the liability of the tenant may extend to providing a legal defense for the property owner as a result of the tenants negligence.

Endorsements:

Sometimes referred to as “riders,” an endorsement to an insurance policy is basically an amendment or addition to an existing policy. By adding an endorsement, the insurance provider is altering the terms of the basic policy by adding, deleting, or excluding certain areas of coverage.

The most common insurance endorsement we come across refers to adding the owner as an additional insured to the insured tenant’s policy coverage. Adding the property owner as an additional insured by policy endorsement means that the owner is also covered under the same policy as that of the insured. The property owner must be extremely cautious as without this endorsement attached, any issued Certificate of Insurance, as proof of coverage will usually state that without an endorsement, the owner is not an additional insured. We often see many Certificates of Insurance issued without such an Endorsement and recommend that the owner require, and actually receive that endorsement. This should be done prior to any tenant occupancy, or certain work performed on the property.

As an additional word of caution, the additional insured endorsement only extends coverage to the extent in which the policyholder is at fault and then only to the extent of their coverage. As such, the named additional insured will not necessarily receive the full liability coverage protection as the insured party if they hold any blame for the harm suffered.

Please see our other related articles

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Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action,accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.

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