Make Tenant Adapt Insurance Coverage to Changing Circumstances

Sadly, public violence has escalated in the past few years, with attacks in workplaces, entertainment venues, and malls. Regardless of the security measures you take to prevent or deal with violent attacks occurring on your property, some things will always be out of your control. From time to time, you should check to make sure your insurance policies provide adequate coverage. That’s still not enough, however. You should require your tenants to always maintain adequate coverage as well. But if your lease with a tenant doesn’t secure your right to boost the tenant’s insurance coverage, you might not be able to force it to adjust the coverage—leaving you vulnerable.

Don’t Overlook the Obvious

In most cases, owners list the tenant’s minimum insurance requirements in the lease. They might not 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 office building or shopping center could face, it’s important that you give yourself the right during the lease term to require the tenant to buy new or additional insurance and increase coverage when necessary.

Owners often overlook the obvious reasons for increasing insurance coverage. So when you’re negotiating for the tenant to adjust its coverage, make sure that these key instances trigger your right:

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, midway through the lease, a gym in your center 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. It’s not uncommon for a bank to ask an owner to increase its insurance coverage and to make its 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.

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 a certain dollar amount in commercial general liability insurance. But after a stronger than normal hurricane season, or a spike in violent crime, the coverage requirements could increase substantially. 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 25 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.

Carve Out Right

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. 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 do this, ask your attorney about including this language in 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:

(1) 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

(2) 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.

However, you should be prepared for pushback. If your tenant resists because it feels that you’re requiring it to spend money when it isn’t necessary, stick with the same lease language, but make some compromises.

First, agree that you’ll 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’re being fair. Second, review coverage periodically. Agree to review your tenant’s insurance at certain agreed-upon intervals and require the tenant to purchase new insurance or increase coverage if necessary. And link a demand for increased coverage to a change in use or manner of use.