Posts|February 17, 2022
What Is Lurking In Your Lease?
By Natalie Sherod
Risk Advisor CPCU, CIC
Once executed, a lease can be one of those documents which does not get a lot of attention. Ample time is spent negotiating terms but is often not reviewed until a business is close to their term renewal. In the world of insurance, this can be problematic as there could be unintended coverage gaps based on the lease provisions and policy language. Here are a few key items to review annually as you consider your insurance needs.
- Who insures what? This may seem like a very easy question to answer. The landlord insures the building structure and the tenant insures their own furniture, fixtures, and alterations, right? That is not always the case. Each lease is different and I have seen leases that require the tenant to insure the structure or components of the buildings such has HVAC units, plumbing fixtures, etc. This could lead to an uncovered claim if not identified.
- What if I make alterations? Most leases require that tenants insure their interest in tenant improvements and betterments. This can get confusing if the alterations become a permanent part of the building. Take, for example, a manufacturer who leases a warehouse and builds production spaces, spray booths, etc. The manufacturer cannot take it with them if they leave, but may still be responsible for insuring it while they are a tenant. It is important to know who is responsible for insuring this and make sure limits are adequate.
- What about repairs and replacement? A lease will spell out which party is required to repair/replace building components such as plumbing fixtures, HVAC units, carpets, etc. Sometimes these will dovetail with insurance requirements and other times they do not. I have seen multiple leases which require the landlord to insure the real property (including fixtures like plumbing and electrical ) but then, in a different provision, require the tenant to repair and replace the same fixtures under all losses. If building coverage is not specifically listed on your policy, this could be an issue.
- Who defends who? A lease will likely outline which party is responsible for defending or indemnifying the other in the event of a claim. It is important to understand this provision and ensure the insurance policy will support what is assigned.
Once the lease is executed, it can be difficult to amend the terms, but it is always important to have an understanding of your responsibilities and limitations when it comes to your lease and insurance. At Cavignac, the lease review is a critical part to our annual process. We are happy to answer to answer any questions you might have!
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