Adequacy of Insurance Limits

Commercial leases almost invariably contain provisions requiring the tenant to purchase and maintain insurance coverage, and in some cases require the landlord to purchase insurance with regard to occurrences in the common areas. Although the scope of these provisions can vary widely, a fundamental purpose at the heart of the clauses is to protect both the tenant and the landlord from claims for, or related to, personal injuries and property damage at the leased premises. Property managers, practitioners and others involved in day-to-day operations involving leases are familiar with the myriad provisions typically included for this purpose. These usually range across coverage specifications, ratings requirements to be met by the insurers, designation of the landlord as an additionally protected party, and exceptions to the so-called “insured versus insured” exclusion often found in commercial insurance policies. Insofar as each of them desires to maximize the amount of available protection, insurance procurement can be a matter of which landlords and tenants have a commonality of interest. However, the care taken by landlords and tenants when reviewing and negotiating lease provisions that relate to insurance coverage often ends with the basic considerations mentioned above. When contemplating or assessing the degree of desired protection, both landlords and tenants often fail to take into account the effect of certain aspects of the underlying insurance policy. Instead, they frequently are familiar only with the coverage summary set forth in a declarations page or certificate evidencing the existence of the policy. Although an examination of all of the significant aspects of the underlying policy that should be of interest is beyond the scope of this article, two important points are identified below that should be factored into the risk management decisions of both landlords and tenants with respect to underlying insurance.