Secure Right to Boost Tenant's Insurance Coverage
In mid-October 2008, Chase Bank received small packages of white powder at several of its branches across the United States. The Federal Bureau of Investigation (FBI) was called in immediately, fearing that someone upset about the economy decided to lash out at bank officials by poisoning them with anthrax. After numerous field tests, the FBI determined that the white powder was harmless. But what if the threat had been real?
Regardless of the security measures you take to prevent or deal with violent attacks or natural disasters occurring on your property, some things will always be out of your control, says New York City attorney John Busey Wood. Periodically checking to make sure your insurance policies provide adequate coverage is only half the battle'you should require your tenants to always maintain adequate coverage as well.
In most cases, owners list the tenant's minimum insurance requirements in the lease and don't consider the fact that as new risks and challenges arise, tenants may need to buy new types of insurance and increase their policy limits. In light of the endless number of catastrophes, known and unknown, that tenants in your building could face, it's important that you, as a commercial property owner, give yourself the right during the lease term to require the tenant to buy new or additional insurance and increase coverage when necessary.
A Common Mistake
Most owners forget to give themselves this right because they overlook the obvious, says Wood. Some of the more basic reasons for increasing coverage are:
Tenant's use or manner of use of space changes. If you've let a tenant change the use or manner of use of the space, it's appropriate to ask that tenant to ensure that the new venture is adequately covered.
For example, if you have a tenant that owns a bodybuilding gym and midway through the lease it decides to add a rock-climbing wall, you should ask that tenant to make sure that it has considered and provided coverage for the risks associated with that activity. Otherwise, if someone gets hurt and the tenant isn't properly insured, the injured person might look to you to cover the cost of medical bills and any other damages.
Your lender requires more insurance. As banks tighten their lending standards, expect them to ask owners to increase their insurance coverage and to make their tenants do the same. But if you can't persuade your tenant to increase its coverage and the lease doesn't address it, your financing might be in jeopardy, warns Wood.
Coverage minimums increase. Coverage minimums are somewhat unpredictable and can increase at any time. And if the increases are based on new legal requirements, you won't have a choice about whether to increase your tenant's insurance coverage.
For example, when your tenant signed its lease, insurance industry standards may have called for owners in your area to require mid-size tenants to carry $3 million in commercial general liability insurance. But after a stronger than normal hurricane season, or a spike in violent crime, the coverage requirements could increase to $6 million. Without the right to make the tenant increase its coverage, you risk the liability being passed on to you.
New types of coverage become available. As business and technology advance, so do the needs for insurance. For example, if you signed a lease with a tenant 20 years ago, you had no idea at the time that one day a business would need “e-commerce insurance” to cover against losses resulting from someone hacking into its computer network or intentionally shutting down its computer systems.
Even though it might seem unlikely that this scenario could affect you, consider this: If you don't have the ability to make your tenant get this (or any type) of new insurance and it faces a technical emergency like the one mentioned above, that tenant won't be able to conduct business—so it might not be able to pay you.
How to Protect Yourself
Even if the need never arises, you'll be much better off giving yourself the right to make the tenant buy new insurance or increase its coverage when necessary. Initially, you should start with a more aggressive approach, says Wood. Give yourself the right to make the tenant buy new insurance or increase its coverage whenever you or your lender thinks it's necessary. To get this right, add the following language to your lease's insurance clause:
Model Lease Language
Landlord shall have the right, exercisable in its sole judgment at any time by giving proper written notice thereof to Tenant, to require Tenant to:
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Increase the limit and coverage amount of any insurance Tenant is required to maintain pursuant to this Clause to an amount that Landlord, any superior mortgagee, or any superior landlord may, in its sole judgment, deem sufficient; or
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Purchase other insurance and/or endorsements in such amounts or types as Landlord, any superior mortgagee, or any superior landlord may require from time to time.
Negotiate Compromise
If your tenant resists this approach because it feels that you are requiring it to spend money when it isn't necessary, stick with the same lease language, but agree to do the following:
Be reasonable. Agree that you will be reasonable when deciding if there's a need for new insurance or increased coverage. This might not completely satisfy the tenant, but it will at least give the impression that you are being fair.
Review coverage periodically. Agree to review your tenant's insurance at certain intervals'maybe every three to five years'and require the tenant to purchase new insurance or increase coverage if necessary.
Link demand to change in use or manner of use. You should offer this approach as a compromise when the tenant changes the use or the manner of use for its space, as explained in the example above.
Insider Source
John Busey Wood, Esq.: Partner, Thompson & Knight LLP, 919 3rd Ave., 39th Fl., New York, NY 10022-3915; (212) 751-3215; JBWood@tklaw.com.
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