Insurance and Indemnification in a Commercial Lease

These provisions are usually scattered across several pages, and they are easy to read as boilerplate. They are better read together, as one answer to a single question: if something goes wrong in or near your space, whose money pays for it?

• Insurance requirements. What each party must buy, in what amounts, and how it must be proved.
• Indemnification. When one party must reimburse and defend the other for losses and claims.
• Waiver of subrogation and releases. When one party gives up claims against the other, usually for losses covered by insurance.

Von Briesen & Roper, writing about subrogation clauses, advises reviewing the waiver alongside the lease’s other insurance and indemnification terms so that the allocation of risk stays coherent. A clause that seems fair by itself can be undone by another one three pages later.

Requirements differ by landlord, building and use. Insureon, an insurance marketplace, says general liability is the most common requirement. KMRD Partners, a risk management firm, recommends that both parties carry property, general liability, auto liability and workers’ compensation coverage. Here is what you may see.

• Commercial general liability, covering bodily injury and property damage claims, often with the landlord named as an additional insured.
• Property coverage for your furniture, equipment and, if the lease makes them your responsibility, your improvements.
• Business interruption, which Insureon describes as increasingly required and which helps cover rent and operating costs if a covered event forces a closure.
• Workers’ compensation, as required by law where you operate.
• Excess or umbrella coverage, adding limits above underlying policies, sometimes to satisfy a lease.
• Commercial auto, if your business runs vehicles from the property.

KMRD Partners flags a trap with tenant improvements: internal walls, carpeting and similar alterations often fall under the personal property limit of a standard policy, and companies frequently buy too little coverage for them. If you spent money on the build-out, ask who insures it and who rebuilds it after a loss, then check the limit.

An indemnity is a promise to cover the other side’s losses in stated situations, often including legal defense. A landlord’s form will usually have you indemnify the landlord broadly, sometimes for anything that happens in your space or nearby, with little or nothing coming back.

James Moorhead of Moorhead Law Group, writing in an Illinois State Bar Association publication, calls mutual indemnities the ideal, with each party excluding the other’s negligence and willful misconduct. He notes that landlords may want tenant indemnity even for the landlord’s own negligence, on the theory that the tenant’s insurance should respond. He also warns that the language depends on state law, and that some states void a lease term that shields a landlord from liability for its own negligence. Have an attorney licensed in the state where the space sits review this one.

• ✓Is the indemnity mutual, with each side responsible for its own negligence and misconduct?
• ✓Does our indemnity cover only our premises and our people, or the whole building and common areas?
• ✓Does the landlord indemnify us for its own negligence and for problems in the areas it controls?
• ✓Does the indemnity reach things our insurance will not pay for?
• ✓Have we limited damages so that consequential losses are excluded, in both directions?
• ✓Are releases of the landlord limited, and is liability for concealed conditions or failure to repair checked against state law?
• ✓Does the indemnity survive the end of the lease, and for how long?

When an insurer pays a claim, it may gain the right to pursue whoever caused the loss. That right is subrogation. Picture a fire that starts in your suite and damages the building. The landlord’s property insurer pays the landlord, then sues you to get its money back, potentially for far more than your policy limits.

A waiver of subrogation prevents that. Each side agrees that its insurer gives up the right to go after the other for covered losses. Moorhead notes that a mutual waiver benefits the tenant in particular, since tenants occupy the space daily and are more likely to cause a casualty than landlords, and that insurers generally accept mutual waivers in current leases. KMRD Partners goes further, saying one should be in every lease.

Von Briesen & Roper lists the choices to review.

• Is it mutual, or does it benefit only one party?
• Which policies does it cover? It most commonly covers property insurance but can reach other required policies, and each party should confirm that its policies allow the waiver.
• Does it apply only to proceeds actually received, or to all risks the lease required the party to insure, whether or not it did?
• If a required policy is excluded, is there another protection, such as additional insured status?

Tell your insurance broker the lease has a waiver of subrogation. A promise in the lease is more useful when your policy expressly allows it.

Landlords usually want proof of insurance, often a certificate, before you take possession and at each renewal. Insureon notes that landlords typically ask for a certificate, and that a landlord may ask to be named as an additional insured on your policy. KMRD Partners recommends that the protection run both ways, with the landlord naming the tenant as an additional insured on its general liability policy for areas such as the parking lot, lobby and roof, and with both parties providing evidence of insurance.

A lapse can create a default, so treat renewal dates as lease dates. Also confirm the landlord’s list of required parties, such as its property manager and lender, matches what your broker has endorsed. Ask whether the landlord can raise your required limits later and whether it must be reasonable when it does.

1. Send the insurance, indemnity, waiver, casualty and default provisions to your insurance broker with the draft lease, before you agree to them.
2. Ask the broker to list anything you cannot buy, cannot afford or are not currently carrying.
3. Ask your attorney to review the indemnity and release wording for your state.
4. Ask for the landlord’s obligations to be stated, including what it insures and what evidence it must provide.
5. Calendar policy renewals and certificate deadlines with your other lease dates.

Tenant Advisory Group represents tenants and buyers. We raise these points with the landlord alongside the business terms, and we help keep the broker, the attorney and the lease timeline connected so that the insurance review happens before signing. KMRD Partners gives the same advice: have your insurance professional review these provisions before you sign.