A commercial lease insurance clause is an important part of the commercial lease agreement between a landlord and tenant. Most commercial leases require both parties to have insurance that covers the building and everyone involved in the transaction. The insurance clause details who is responsible for insurance and what kind of coverage they are required to have.

Common insurance requirements are things like property damage and liability coverage, but some agreements have more unique requirements, such as loss of rent or business interruption coverage for leased properties.

What is Required in a Commercial Lease Insurance Clause?

It is very common for landlords to require their tenants to have certain types of insurance. Most landlords demand their tenants have a number of kinds of insurance, including

  • General liability
  • Property damage
  • Business interruption
  • Automobile liability
  • Worker's compensation

It is also common to require an umbrella policy to cover all miscellaneous areas. Most tenants don't have these types of insurance in place beforehand.

A commercial lease insurance clause details everything the tenant and landlord need to know about insurance, including:

  • What insurance is required
  • Insurance limits
  • If insurance is based on an occurrences or claims that are made
  • What type of insurer must be used

Most landlords want their tenants using a reputable insurance company and will likely have specific recommendations about the rating the insurer has using the AM Best ratings.

What Role Do Tenants Play in the Insurance Agreement?

Although most tenants don't usually negotiate the details of the insurance provision, the issues should still be discussed between the landlord, tenant, and insurer to make sure everyone is clear on what is required. Tenants should talk to their landlords to make sure their policy meets the requirements of the agreement.

As a lease increases in value, tenants usually have more control over the insurance requirements. In those cases, a tenant might be able to negotiate for higher deductibles, lower limits, or to remove certain insurance requirements.

Why is the Insurance Clause Important?

Renting and leasing property comes with a lot of risk, which is why the insurance clause is one of the most important parts of a lease agreement. Most insurance provisions are relatively similar. The most important part isn't writing the agreement but reading it so that everyone can understand how it applies to them.

Insurance clauses are particularly important for businesses that work with hazardous materials. These types of companies should pay extra attention to the insurance requirements set forth by their landlords.

What is Liability Insurance?

One of the most common insurance requirements is liability insurance. Also known as commercial general liability insurance or public liability insurance, it protects against someone getting hurt on the property.

If a person falls down the stairs and breaks their leg and then sues the tenant, liability insurance pays for the settlement. It depends on the term of the lease as to how much liability coverage is required and who pays for it. In some cases, liability insurance only applies to the building itself, but not the product or employment practices. In these situations, landlords and tenants also need insurance that goes beyond general insurance to cover their business, no matter what is required by the lease.

What is a Gross Commercial Lease?

A gross commercial lease uses fixed monthly rental payments. These monthly rental payments cover building maintenance, usage, taxes, and insurance. Because everything is included, tenants don't have to pay separately for insurance and won't have their rent increase if insurance costs go up.

Gross commercial leases allow the building owner to decide on insurance coverage and coverage limits, but the tenant typically can approve the choice or not. Gross leases are most common for Class B or Class C buildings, which are properties that have rents that are at or below the local average rental price. In many cases, these types of landlords are more willing to negotiate about insurance, especially with older buildings with properties that are harder to rent.

A modified gross lease is when the landlord and tenant split the costs of maintenance, taxes, and insurance. For example, the landlord agrees to pay for maintenance and property taxes, and the tenant pays for smaller repairs and liability insurance.

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