Insurance, Indemnity & Casualty

What tenants should watch for

Insurance

Tenant insurance: limits and types. Carry Commercial General Liability (CGL) of $1M per occurrence / $2M aggregate, plus a $5M umbrella, for a $6M total minimum coverage. Resist landlord-imposed $5M/$10M base CGL; a large umbrella is more efficient. Carry all-risk property insurance at full replacement cost on Tenant’s property and Tenant’s improvements. Workers’ compensation as required by law. Business interruption insurance for at least twelve (12) months’ rent. Auto liability if Tenant operates vehicles at the Premises. Because insurance nomenclature changes over time, describe required property coverage as “special form” (the successor to “all-risk”) or such other similar coverage as is then in effect; naming an obsolete coverage form creates ambiguity at renewal.

Limits adjustment over term. Resist automatic landlord-determined increases. Allow landlord to require reasonable increase no more often than every five (5) years, based on commercially reasonable amounts for similar tenants in similar projects.

Additional insureds and certificates. Name landlord (and landlord’s lender and property manager if requested) as additional insureds on CGL. Tenant insurance is primary as to tenant’s use; landlord’s insurance is excess. Tenant delivers certificates of insurance on request and within twenty (20) days after each renewal.

Self-insurance. For large or creditworthy tenants, reserve right to self-insure the deductible portion of property and CGL with parent-company net worth above a defined threshold (e.g., $100M consolidated net worth, audited financials).

Landlord insurance. Require landlord to carry property insurance on the Premises and the Project at full replacement cost; commercial general liability on the common areas; rent loss insurance for at least twelve (12) months; flood and earthquake where reasonably available and commercially reasonable. Landlord shall name Tenant as additional insured on common-area CGL.

Premium increases attributable to the Permitted Use. Resist provisions that make Tenant responsible for increases in Landlord’s insurance rates where the increase results merely from Tenant operating under the Permitted Use.

Deductible pass-through cap. Where Landlord passes property-insurance deductibles through Operating Expenses, cap the annual pass-through at a fixed dollar amount and require amortization of any excess over the useful life of the improvements being repaired or replaced, with a commercially reasonable interest factor.

Blanket policies. Preserve Tenant’s right to satisfy its insurance obligations through a blanket policy; expect Landlord to require an endorsement specifically identifying the Premises, a minimum guaranteed per-occurrence coverage amount for the Premises, and a waiver of any pro rata distribution requirement.

Property insurance: replacement value, not “full insurable value”. The phrase “full insurable value” has no fixed meaning in the insurance industry and invites the party purchasing the coverage to procure only actual-cash-value insurance, which deducts physical depreciation and may leave restoration underfunded after a major casualty. Require property insurance at one hundred percent of replacement value (with like kind and quality restoration), whichever party carries it, so the casualty restoration obligation is actually funded.

Insurance cost pass-through formula. Where anchor tenants self-insure or carry their own policies, landlords replace the standard gross-leasable-area proration with formulas that reallocate the anchors' unreimbursed share of the landlord's insurance costs to inline tenants. Tenant counsel should require proration over the entire gross leasable area of the project, without exclusion of self-insuring or separately insured tenants' square footage from the denominator.

Deductible pass-through limits. Landlords carrying high-deductible policies attempt to pass deductibles through as operating expenses. Cap the deductibles passed through in any calendar year at a stated dollar amount, require any excess to be amortized over the useful life of the improvements repaired or replaced, and exclude deductibles attributable to landlord negligence and to earthquake, flood, and terrorism coverage unless separately negotiated.

Indemnity and subrogation

Mutual indemnity. Each party indemnifies the other for claims arising from its own negligence or willful misconduct, subject to applicable insurance and the mutual waiver of subrogation. Carve out from tenant’s indemnity: (i) landlord’s gross negligence, willful misconduct, or criminal acts; (ii) landlord’s insurance and indemnity obligations; (iii) landlord’s express representations and warranties; (iv) liabilities under any anti-indemnity statute.

Mutual waiver of subrogation. Each party waives all claims against the other to the extent the claim is or should be covered by the waiving party’s insurance. Each party shall include a waiver-of-subrogation endorsement in its property policy. Insurance carriers must consent in writing.

Repair chargebacks versus waiver of subrogation. Landlord repair clauses commonly charge Tenant for any damage caused directly or indirectly by Tenant or its invitees, including roof damage attributed to Tenant’s rooftop equipment; unless expressly made subject to the mutual waiver of subrogation, these fault-based chargebacks effectively void the waiver as to insured casualty losses. Make every repair-cost chargeback expressly subject to the waiver of subrogation.

Casualty

Casualty: restoration obligation. Landlord shall restore the Premises if damage is less than fifty percent (50%) of the replacement cost of the Building, with restoration to substantially the same condition as before the casualty (or as required by current code). For damage between 50% and 75%, both parties have termination rights with notice within sixty (60) days of casualty. For damage in excess of 75%, lease automatically terminates unless both parties agree to restoration.

Casualty: rent abatement. Tenant’s rent abates proportionally from the date of casualty based on the area of Premises unusable; abatement continues until Substantial Completion of restoration. If Substantial Completion is not achieved within twelve (12) months of casualty, Tenant may terminate the Lease by written notice; if within eighteen (18) months, Landlord may terminate.

Casualty: late-term termination. Tenant has the right to terminate after any casualty occurring in the last eighteen (18) months of the Lease Term (or last twelve (12) months if exercise of any Renewal Option is feasible), to avoid the burden of restoration for a short remaining period.

Casualty: insurance proceeds. Property insurance proceeds shall be applied to restoration. Tenant retains rights to proceeds for Tenant’s improvements paid by Tenant (including TI Allowance disbursements to the extent Tenant has not been credited). Landlord may not retain insurance proceeds for purposes other than restoration without Tenant’s consent.

Casualty: restoration of Tenant’s improvements. After restoration of the Building shell by Landlord, Tenant restores Tenant’s improvements using Tenant’s insurance proceeds. If Tenant’s improvements were paid by Landlord (TIA), Landlord restores those at Landlord’s cost.

Casualty rent abatement: endpoint definition. Landlord casualty forms terminate rent abatement at the earlier of (i) the tenant's taking possession of any part of the unusable space for any purpose or (ii) substantial completion of restoration, and reduce the abatement proportionately as portions of the space are restored. Tenant counsel should tie the abatement endpoint to restoration sufficient for the conduct of Tenant's business in the affected portion, define substantial completion objectively, and preserve the abatement during any emergency or temporary re-entry into the damaged space.