Insurance obligations under commercial lease agreements vary on a case-by-case basis. A common situation for clients is where a tenant is a part of a large corporation with access to discounted insurance premiums. On the surface, this may seem to be the most economical and convenient solution, with the tenant taking the insurance responsibilities off the property owner. If part of a larger insurance programme, the tenant may also be able to obtain the insurance at cheaper rates thereby reducing their outgoings payable under the lease agreement. However, there are risks associated in taking this approach which must be considered by the property owner.
These can include:
- Not all property insurance policies are the same – The terms, conditions, exclusions and type of policy can vary significantly. In light of the current events in Australia, flood is a great example of a common exclusion which the property owner may wish to cover.
- Non-disclosure by the tenant with regards to claims history or property conditions (eg the presence of asbestos) could mean the insurer is entitled to void the contract.
- The interests of the tenant and property owner can vary – The property owner is looking to protect their asset and would seek a policy with adequate cover. A tenant may be driven to look to the cheapest option or to cut cover if the tenant is required to pay the premium under the lease agreement.
- The tenant may cancel the policy during the period of insurance or not pay the premium, resulting in no cover being in place at claim time
- Some property policies contain aggregate or annual limits which may be exhausted by the time you need to lodge your claim if the tenant has already made claims. An event causing a loss at the location may affect both the tenant and property owner assets, meaning event limits will also be shared.
Often, disputes between tenants and property owners arise where needs and requirement differ between the two parties. We had a recent example where the tenant attempted to pressure the landlord into insuring the building for a lower amount. Fortunately, the property owner was aware of the replacement value so agreed to top up the cover to ensure the property was adequately protected for its true value. Without this, the owner would have been short on cover should a claim arise.
More seriously, we came across a property owner who had to demolish their entire building following a natural disaster. The property owner had allowed the tenant to insure the building as they had a large property insurance policy where it could be included at a minimal premium. The property owner was an individual with the property making up the bulk of their retirement plan. Unfortunately, it wasn’t known until the claim was made that the tenant’s policy contained a seven-figure excess. One point which is silent on a lot of lease agreements is ‘who is responsible for the payment of the excess should a claim arise’? In situations such as this, the only options available for the property owner are to deduct this amount from the claim (with the tenant not compelled to pay) which may result in the owner unable to afford the rebuild costs or the cash pay out plus sale of the land may have been less than the finance owing on the property. It is critical that the tenant and property owner determine who is responsible for the payment of the insurance excess from the outset.
To protect property owners from the above and to control the protection of your asset, we strongly recommend you manage and implement your insurances individually, and that the excess under the policy needs to be at an acceptable pre-agreed level.