In commercial real estate, tenants are usually required to carry some form of insurance. This protects tenants from losses due to injury, natural disaster or expensive repairs. It also helps define responsibilities to landlords, and other third parties, like customers and employees. While commercial real estate insurance may seem like a simple aspect in a lease, it’s crucial that landlords and tenants truly understand what is expected of one another.
Commercial Real Estate Insurance Truths
Simple Truth #1: Landlord and tenant should carry insurance.
Simple Truth #2: Landlord and tenant should insure their own interests.
Simple Truth #3: Tenant has an interest in having the landlord insure the tenant’s interest.
Huh? Let’s break those down.
In commercial real estate, the tenant is required to have insurance. The landlord should have insurance, but that’s not always the case. There have been many instances when the landlord does not have adequate .
Let’s look at an example. The lease states that the landlord doesn’t have to carry insurance. However, there are seven paragraphs about tenant insurance, including that if the landlord doesn’t have insurance, the tenant’s insurance will be primary. In this case, the tenant ends up paying an extra premium to get the coverage that the landlord required under the lease.
Building Insurance, Repairs and General Liability
The building shouldn’t be the only thing that the landlord insures. He/she should insure the land that the building occupies and any other landlord-controlled items, like parking lots or the lobby area. This is called property insurance. Property insurance protects the area if there is damage to the building or the land. Think about a fire, a flood or if someone crashes a car into the building. Of course, there are a number of things that can affect the property, and whether an event creates a small or large impact, insurance is crucial.
As a tenant, there are bound to be times when your space needs repairs. If there is a leak due to a broken pipe, you may not be able to work in your space during that time. Even though you’re unable to use your space during repairs, you are still required to pay rent. That is where renters insurance comes in.
Another form of insurance needed in commercial real estate is general liability. This type of insurance covers injuries and property damage. This covers situations involving a customer, invitee, contractor, employee or someone else who is injured on the property.
Proportionate Share of Insurance
When it comes to insurance, both parties need it. The tenant needs to insure his/her own interest, but the landlord also needs to insure what he/she owns. The only place the landlord gets revenue to make that sort of payment is from the tenant, so the landlord will usually charge the tenant for a share of the insurance cost. Each tenant should pay their proportionate share of the insurance cost.
What ensures that the landlord carries insurance?
Remember: The lease could also require the tenant to carry the insurance that the landlord requires, without taking into account what insurance the tenant already has!
Does that sound reasonable? Of course not!
Insurance can be tricky and downright confusing when you’re entering into a commercial real estate lease. That’s why it’s so important to have a commercial real estate attorney work with you to create a lease that’s fair.
When you’re not sure what your lease requires of the tenant and landlord in regards to insurance, let’s set up a time to figure it out!
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