Include All Parties Needing Coverage in Tenant's Liability Insurance Policy

To be protected if someone who's injured in the tenant's space sues you, you'll require the tenant to name you as an “additional insured” on its liability insurance policy. But if your lease is like many we've seen, it may contain a loophole: The lease may require only that the party identified in the lease as the “Landlord” be named in the tenant's policy as an additional insured. That may not give insurance coverage to everyone needing protection.

For example, a successor owner may have no coverage under the tenant's liability insurance policy because it's not the “Landlord” named in the lease, warns insurance specialist Charles E. Comiskey. And parties such as managers, employees, and affiliates who are working for or related to the Landlord—whether the original or a successor owner—won't be covered. These parties also need protection under the tenant's policy, he says.

Tenant's Insurer Won't Have to Defend Parties Not on Policy

If you and your related parties aren't considered additional insureds, the tenant's insurer has no obligation to defend you against any claim by someone hurt at the property. So you'll have to fend for yourselves unless your own insurance will cover the defense or you can get the tenant to indemnify—that is, reimburse and defend—you and your property manager.

You can even suffer if you're protected in the lease as the Landlord but your successor is sued. For example, suppose you set up a subsidiary and transfer your office building or shopping center to it, along with all of your building's or center's leases. The subsidiary is your successor. But the leases require the tenant to name only you—not your successors—as an additional insured in its liability policy. As a result, if someone sues the subsidiary and its employees because he was injured in the space, the tenant's insurer will have no obligation to defend the subsidiary and its employees in the lawsuit because they're not covered by the tenant's policy, warns Comiskey.

And a third-party buyer of your building or center could raise objections if your tenants’ insurance policies don't have to protect successor owners, adds Comiskey.

Practical Pointer: Relying on the tenant to indemnify you isn't worthwhile, says Comiskey. You may have to go to court to enforce the indemnity and, since many states have anti-indemnity laws, the court may rule that the indemnity is unenforceable, he explains. Also, under most insurance policies, the costs of defending you count toward the tenant's limits of liability, which can rapidly erode the coverage available to you, he adds.

Require Coverage for Related Parties

To plug this loophole, say in the lease that the tenant must name you and all of your related parties—also known as “Landlord Parties”—in its liability policy as “additional insureds,” says Comiskey. Landlord Parties should include:

Owner and property owner. Both the owner named in the lease and the party that owns the building or center (if they're different entities) must be named as additional insureds in the tenant's policy, says Comiskey.

Managers, officers, directors, shareholders, partners, members, and employees. Any of these people could be sued along with you if someone is injured at the tenant's space. So they need additional insured protection under the tenant's policy, too, says Comiskey.

Lenders. Your loan agreement might require you to name the lender as an additional insured in the tenant's policy so that any money due you from the tenant's insurer will be paid to your lender. Not adding the lender on the tenant's policy could violate your loan agreement, cautions Comiskey.

Successors, assignees, affiliates, and subsidiaries of all the above parties. Since you might transfer ownership of the building or center to another entity that's related to you—say, a successor or an affiliate—you'll want that entity to get the same protection you had under the tenant's policy, says Comiskey. Your other related parties may also be replaced by successors or assignees, who'll need protection, too, he adds.

Add Lease Language

To make sure all of your related parties and their successors and assignees are properly protected under the tenant's liability policy, Comiskey recommends that you replace “Landlord” with “Landlord Parties” in the section of the lease that requires the tenant to name the Landlord as an additional insured, and add the following definition of Landlord Parties:

Model Lease Language

For the purposes of this Clause [insert # of insurance clause], “Landlord Parties” shall mean:

a. Landlord,

b. [insert name of party owning the Building/Center, if not Landlord],

c. any lender whose loan is secured by a lien against the [Building/ Center] (“Lender”),

d. [Building/Center] manager, and

e. the respective affiliates, subsidiaries, successors, assigns, heirs, officers, directors, shareholders, partners, members, employees, agents, and contractors of Landlord, [insert name of party owning the Building/Center, if not Landlord], Lender, and [Building/ Center] manager.

Practical Pointer: A savvy tenant will balk at having to name an owner's contractors in the tenant's liability policy as additional insureds, says Comiskey. So you may have to delete contractors from the definition of Landlord Parties.

CLLI Source

Charles E. Comiskey: Vice President, Brady, Chapman, Holland & Assocs., Inc., 2190 N. Loop W., Ste. 200, Houston, TX 77018; (713) 688-1500.