Avoid Ambiguity in Insurance Policy Requirements

It’s crucial that your tenants are adequately insured. To make sure of this, your leases may list by name the insurance coverage that the tenants must get and maintain. If you think you’re covering all your bases by writing this into the lease in such a specific way, you could actually end up boxing yourself in.

Why Specifying Coverage Can Lead to Trouble

If the named insurance coverage is no longer in existence—or the name changes—you have an ambiguity in the lease. A tenant could argue, and a court could agree, that the tenant isn’t required to get the insurance you intended. For example, property insurance policies used to provide coverage known as “all risk.” Now the equivalent, although not identical, coverage is referred to as “special form.” If your lease was drafted before this change and requires the tenant to get property insurance with “all risk” coverage, which is no longer available, it becomes ambiguous. When the tenant’s insurance comes up for renewal, what insurance coverage should it get? And should it even have to get coverage if the required coverage no longer exists?

Make Requirement Flexible

When you draft your lease, you can add flexibility to your insurance policy requirement instead of being too specific by saying that if the named insurance coverage isn’t in effect when the tenant is required to get it, the tenant must get other, similar insurance coverage that’s then in effect. This way, the tenant can’t argue that it’s relieved of getting the insurance coverage named in the lease because it’s no longer in effect.

To protect yourself, ask your attorney about adding this language when you list named types of insurance coverage that the tenant must get. (Keep in mind that you’ll need to mention policy limits and other requirements elsewhere in the lease):

Model Lease Language

(x) A policy of [insert type, e.g., property] insurance with [insert type of coverage, e.g., special form] coverage, or if such coverage is not in effect when needed, such other similar coverage as is then in effect.

Respond to Tenant’s Modification Request

A savvy tenant may demand that you modify that language to require that “such other similar” coverage also be affordable and readily available—so that if the replacement insurance is too expensive, the tenant isn’t required to get it. Don’t accept this demand—it’s too easy for the tenant to call the similar coverage too expensive and refuse to get it. Compromise by saying in the lease that the insurance coverage must be “commercially, reasonably available.” Then define “commercially, reasonably available” to mean that a majority of similarly situated tenants in your area have gotten that coverage and are required to maintain it.

To use this compromise, add the following to the language above:

Model Lease Language

Such coverage shall be commercially, reasonably available. For purposes of this Paragraph, such coverage will be deemed to be commercially, reasonably available if a majority of similarly situated (or comparable) tenants in [insert location] have obtained such coverage and are required to maintain such coverage.

To find out whether particular insurance coverage is commercially, reasonably available, you can contact your insurance broker. Your broker should have a sense of what kinds of insurance coverage other owners and tenants are carrying.