Nearly every agreement involving the use of real property requires general liability insurance in some form. Once the basic terms of use are settled, most of the questions that come up next are about general liability insurance and related coverage — and insurance requirements are often the most misunderstood, overlooked part of a real estate agreement. What follows answers the questions that come up most often.
Insurance Requirements
Requiring a tenant or other user of your property to carry insurance exists to protect the property owner. Without tenant insurance, damage a tenant causes to the rented premises becomes the owner’s problem — not just the repairs, but the cost of making those repairs. Still, more important than the insurance itself is a well-written agreement that spells out the insurance requirements clearly, for both the tenant and the property owner’s own policy.
Basic Types of Policies Beyond General Liability Insurance
General liability insurance is just one piece of a larger picture. Insurance coverage generally falls into two broad categories: liability coverage, which protects the insured from claims arising from personal injury or third-party property damage they caused, and casualty insurance, which protects the property owner for physical damage to the real property itself.
- General Liability Insurance: covers an organization for injuries and third-party 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 — reimburses the owner for damage to the property or building, or theft of personal property.
- Workers’ Compensation Insurance: required in California under Labor Code §3700 for any employer with at least one employee, even part-time — covers medical bills, missed wages, and recovery costs for an employee injured on the job.
- Business Interruption Insurance: replaces lost revenue when a business can’t operate, such as after a natural disaster.
General Liability Insurance Coverage: What Actually Gets Paid
The most important detail in any general liability insurance policy is often what it doesn’t cover, not what it does. A lease should require the tenant’s policy to cover the owner’s building and improvements at full replacement value — meaning the insurer pays to repair or replace the damage as if it never happened, not the depreciated value of the building. Some limiting factors always exist, like changes in building codes since original construction, but the property is generally restored to its prior condition.
Full replacement value limits don’t always keep pace with what a property is actually worth. That’s where an Umbrella Policy comes in — additional liability coverage above a primary policy’s limits, used to make up the difference. Any agreement should also require an annual review of the full replacement value, with adjustments as needed.
A related concept, actual cash value, comes into play when a damaged building will be demolished rather than rebuilt — the insurer takes the full replacement value and deducts for depreciation.
Waiver of Subrogation
To subrogate means to “step into the shoes of another” — a substitution of one party’s rights against a third party. An insurer generally won’t pursue a negligent party directly; instead, it pays its own insured, then subrogates to stand in that insured’s shoes and recover from whoever actually caused the loss.
For example: if a tenant’s negligence damages your property, and your insurer pays to repair it, your insurer becomes subrogated to you — meaning they can step into your shoes and pursue your tenant (or the tenant’s insurer) for reimbursement, including through a lawsuit.
A waiver of subrogation heads this off. It prevents your insurer from stepping into your shoes to pursue your own negligent tenant, reducing the chance of that kind of litigation. Some insurance policies include language limiting an insured party’s ability to waive subrogation rights, so a well-drafted tenant agreement should have both parties waive their right to recover against each other for any loss the required property insurance would cover. When in doubt, ask your insurance provider directly how they want to handle it — most carriers will add an endorsement permitting the waiver, but it’s their call to make, and worth confirming before you agree to give up that right.
Indemnity
An indemnity, or hold-harmless, provision in a rental agreement makes the injured party whole for a loss caused by the tenant — including attorney’s fees, litigation costs, and actual damages. To indemnify the property owner means relieving them of responsibility for damage or loss arising from the tenant’s action (or inaction): shifting liability rather than leaving the owner holding it.
This typically extends to allocating liability for injury or property damage arising from the tenant’s use of the property, and can extend further — to providing the property owner a legal defense when the claim stems from the tenant’s own negligence.
Endorsements
Sometimes called “riders,” an endorsement is an amendment to an existing insurance policy — adding, deleting, or excluding coverage. The most common one property owners deal with: adding the owner as an additional insured on the tenant’s own policy. Without that endorsement actually attached, a Certificate of Insurance — the usual proof of coverage — will typically state the owner is not an additional insured, regardless of what anyone assumed. Confirm you actually receive that endorsement, not just a certificate referencing it, before any tenant occupies the property or performs work there.
Even with the endorsement, coverage as an additional insured only extends to the extent the underlying policyholder is at fault, and only up to their coverage limits — the additional insured doesn’t automatically receive the same full protection as the named insured if they share any blame for the loss.
For more on how these policies work together, and where general liability insurance fits alongside property and workers’ compensation coverage, see the CA Department of Insurance’s Commercial Insurance Guide.
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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.
