Insurance is one of a commercial landlord’s the largest expenses. They insure against damage to their buildings, loss of rents, various legal liabilities, and workers compensation to name a few. However, many commercial landlords shoulder risk unnecessarily for the mistakes of third parties. Just because their own commercial landlord insurance policy may pay for a claim, doesn’t mean it should. Each party should bear their own portion of the risk. If a third-party causes a claim, they should pay for it from their insurance so that it doesn’t negatively impact the landlord’s policy.
Who are third parties that may cause this undue risk?
- Contractors and subcontractors hired for maintenance, repairs, and construction
- Vendors and suppliers
- Tenants, patrons, and visitors
An HVAC maintenance technician assaulted a landlord’s tenant while on a service visit. Investigation found the technician had a history of such actions. The tenant sued the technician, the HVAC company, and the commercial landlord who hired them. The HVAC company’s insurance refused to pay since the act of the technician was illegal, and knowingly illegal acts are excluded from most insurance policies. The tenant’s suit against the commercial landlord’s insurance policy asserted negligent management by utilizing unfit contractors, and was successful.
Lapsed Workers Compensation
A commercial landlord had a longstanding relationship with a small but reputable general contractor. The general contractor performed repairs, renovations, and buildouts for the landlord’s properties. The GC was adding a dividing wall to a unit when a framer was seriously injured. The GC had allowed their workers compensation policy to lapse. The framer’s claim therefore was paid by the commercial landlord’s insurance policy and increased their workers compensation costs for three years.
A patron visited a takeout restaurant during COVID and was injured when leaving the premises by falling on a greasy spot on the floor. The patron sued the restaurant and the landlord for medical bills and wages lost while recovering. Although the lease specified the restaurant tenant was responsible for maintaining the premises in a safe condition and the landlord had obtained a compliant certificate of insurance the previous year, the tenant had since taken new coverage which failed to name the landlord as an additional insured. The landlord’s general liability insurance policy had to pay for their own legal defense, plus their insurance carrier non-renewed their policy upon expiration.
Often, risks from these third parties can be transferred away from the landlord for free. Commercial landlords maintain contracts with most third parties, and that is where the risk transfer can take place. Have your insurance agent, in addition to your lawyer, perform a risk review of the contract language. Though some lawyers posses an understanding of insurance, most are not licensed insurance agents and are unable to advise clients are important coverage nuances. Contracts should contain pertinent risk-transfer language as well as specify insurance policies and minimum limits required. Contracts should address risks posed to general liability, workers compensation, business auto, and property insurance policies at a minimum. Any unique risks, such those posed by the specific industry vertical of a tenant, should be addressed as well. Examples of unique risks include pollution, professional liability, abuse, assault and battery, etc.
Sweat the Details – Risk Transfer Language
Each contract should clearly identify what is expected of each party regarding risks of the tenant’s operations and leased premises. Contracts should include clauses that require the landlord be named an additional insured. The tenant’s insurance policy should be required to contain a primary and noncontributory endorsement. Other concerns to be addressed if appropriate are waivers of subrogation and cancellation rights.
Limits and Sublimits
Contracts need to specify which insurance policies are required by the tenant and their appropriate coverage limits. Sublimits can be a concern as well. For example, one sublimit often overlooked is fire legal liability for tenants. This coverage is usually capped at $100,000 which may not be sufficient to pay for damage to a tenant’s unit should they be found liable for the fire damage. This coverage is easily and inexpensively increased to $1,000,000 or more. Other sublimits exist and should be addressed for each unique third-party.
All work to this point will be for naught if the landlord does not monitor the program. Commercial landlords should require subcontractors to provide a certificate of insurance each year that evidences coverage is in place and meets the requirements of the contract. But remember that a certificate of insurance provides only a coverage snapshot in time. The subcontractor could cancel their insurance or stop paying bills and coverage could lapse. Thus, consider requiring certificates of insurance more frequently.
Summary of Recommendations
- Have your insurance agent, in addition to your lawyer, review the insurance language in third-party contracts.
- Identify what risks you are assuming for mistakes of others. Transfer this risk to the appropriate third-party by implementing a risk-transfer program as described here and monitor it. For those risks you are unable or do not wish to transfer, ensure your own commercial landlord insurance policy will protect you.
- Evaluate the administration of your third-party contracts. Specifically, implement a process that specifies who requests certificates of insurance, how often, and who reviews them to ensure compliance.
Questions on how to reduce your third party risk? Contact Mike Barnum, a commercial insurance risk transfer specialist and a certified insurance counselor.