Need to Update the Insurance Provisions of Your Lease?

In 1986, the insurance industry adopted a new property insurance form and a new liability insurance form. These forms introduced new terminology and concepts to the insurance policies carried by most businesses. In particular, retail leases, with their extensive insurance requirements, sometimes contain outdated language or a blend of old and new. Although risk managers for the landlord and tenant typically come to agreement regarding acceptable policies and limits under each lease, even if the lease language is outdated, it would be prudent to bring form leases into compliance with current industry language and concepts and the terminology that expresses these concepts.

Property Insurance

Property insurance covers damage to property owned by a property owner, such as the landlord's own buildings or the tenant's leasehold improvements and furniture, fixtures and equipment. It may be time to review the insurance language in your lease if the property insurance coverage is described as "fire and extended coverage."

The current terminology to describe the various coverages are "basic form," "broad form" and "special form" coverages. Of these three, basic form covers the fewest causes of loss and special form covers the most causes of loss. All three of these coverages are broader than the former fire and extended coverage insurance provisions.

The term "all-risk," when used to describe property insurance coverage, is still in use by risk managers even though the technical language underlying the term has changed. Under current insurance forms, the modern equivalent to all-risk coverage is special form coverage, which insures "risks of physical loss not otherwise excluded." Some typical exclusions from special form coverage include, but are not limited to, settling, cracking, flood, backing up of drains, underground water, artificially generated electric current, collapse of building due to defect, landslides, explosion of steam boiler, volcanic eruption and earthquake. Other exclusions may vary from place to place and from carrier to carrier. It is possible to buy coverages for some but not all of these exclusions.

Another term to avoid is "casualty insurance." This term is sometimes used in leases in place of "property insurance," but is actually a catch-all term that includes both property and liability insurance.

Liability Insurance

Liability insurance covers an insured's legal liability to others for bodily injury, death or property damage arising out of the insured's negligence in the conduct of its business. It may be time to review the insurance language in your lease if the liability insurance coverage is described as "comprehensive general liability insurance" or if there is a reference to a "broad form comprehensive general liability endorsement."

The current terminology to describe the modern liability policy is the "commercial general liability policy," or "CGL." Generally, the CGL policy includes coverages for all of the liabilities formerly covered by the comprehensive general liability policy plus the broad form endorsement.

Another way to spot outdated language is the use of separate liability limits for bodily injury and property damage. The CGL policy contains a so-called "combined single limit" for both bodily injury and for property damage.

Conclusion

The foregoing examples are, of course, only a few symptoms that may indicate that you should consider updating the insurance provisions of your lease or other contract. Any update would require a careful consideration of the relationship of the insurance to be maintained by the respective parties to the lease or other contract to the respective businesses of each party.