Drafting Better Commercial General Liability Insurance Requirements

Describing the Scope of CGL Coverage

Unlike some other types of insurance, such as property insurance, CGL policies are largely standardized. That is, although parties are free to choose their form of CGL policy and to modify any form they use, most businesses in the United States use a CGL policy form promulgated by the Insurance Services Office, Inc. (ISO). Drafters of insurance requirements can take advantage of this standardization.

The benchmark provided by the ISO form is useful, for example, when specifying the content of the coverage to be provided under a CGL policy. Thus, a lease that requires that the CGL must be “written on the current ISO CG 00 01 form” will thereby require the coverages provided in the standard ISO CGL form. To give a party required to carry CGL more latitude in case the party does not use the ISO policy form, the provision may also allow “an equivalent that includes coverage for premises, operations, products-completed operations, personal and advertising injury, and liability assumed under an insured contract.” Each of these coverages is provided under the standard ISO CGL policy form.

Avoiding Obsolete Terminology

In describing the insurance required of the parties, a lease should use accurate terminology. For example, leases should refer to CGL insurance by its proper name: commercial general liability insurance, or at least “general liability insurance.” Leases requiring CGL, regardless of which party carries it, should avoid obsolete names for this coverage, such as “public liability insurance,” “comprehensive general liability insurance,” or “owners, landlords, and tenants (OL&T) liability insurance.”

In the past, various coverages were excluded from the standard ISO form that are now included. Leases addressing these old ISO forms would often require the addition of the missing coverages by endorsement. This is the origin of lease insurance provisions requiring a “contractual liability endorsement” (or “broad form” contractual liability endorsement), a “broad form property damage endorsement,” a “broad form comprehensive general liability endorsement,” a “personal and advertising injury liability endorsement,” or a “host liquor liability endorsement.” All of these coverages are now included in the standard ISO form, and lease provisions requiring these endorsements can be deleted. Similarly, requirements for a “cross-liability endorsement” can be deleted, because this concern is now addressed in the “separation of insureds” provision in the standard ISO form. A party wanting to make very sure that the CGL policy has not been modified to exclude cross-liability coverage (i.e., to make sure the insurer will not refuse to provide coverage to an insured when it is sued by another insured) can add in the lease a statement that “the policy must not contain any cross-liability exclusion.”

Another antiquated but common requirement in leases is that a party must provide a specified “combined single limit” of CGL coverage. This terminology is aimed at language in the old ISO forms that provided separate limits for property damage liability and bodily injury liability. But the current standard ISO forms have abandoned this approach and this terminology, and instead provide four separate limits: per-occurrence, general aggregate, products-completed operations, and personal and advertising injury. Leases should hence avoid the obsolete term “combined single limit,” and should instead refer to a minimum per-occurrence limit (e.g., “not less than $1,000,000 each occurrence”). Alternately, if the parties want to be more specific, a lease can refer to the minimum amount of coverage for each type of limit (e.g., “not less than $1,000,000 each occurrence, $2,000,000 general aggregate, $2,000,000 products-completed operations, and $1,000,000 personal and advertising injury”). In either case, the landlord will want to add that the aggregate limit must apply on a “per-location” basis, if the tenant has more than one location.

Additional Insured Status: Scope of the Coverage

Most leases require the tenant to name the landlord as an additional insured under its CGL policy. This requirement gives protection to both the tenant and the landlord. For the tenant, it means that to the extent other provisions of the lease obligate the tenant to indemnify or defend the landlord for liability that is covered by CGL, the CGL insurer should provide this indemnity and defense on the tenant's behalf. (Note, however, that in most cases, CGL will not cover every potential claim under an indemnity provision. For example, a landlord might be indemnified for a fine imposed on the landlord due to the tenant's failure to comply with laws, and this would not be covered by CGL.) For the landlord, additional insured status provides direct recourse to the insurer's deep pocket, without the need to pursue the tenant or draw from the landlord's own CGL.

A careful landlord, however, will want to specify in the lease the scope of coverage given to it as an additional insured. The tenant, as the “named insured” under the tenant's CGL policy, is typically protected against liability for bodily injury or property damage for occurrences anywhere in the United States. When a landlord is added as an additional insured, the tenant's policy will limit the coverage thereby given to the landlord as an “insured” under the policy. Some limitation is appropriate, because without it a landlord would, like the tenant, be provided with coverage under the tenant's policy against liability for bodily injury or property damage for occurrences anywhere in the United States, even if the liability was due to the landlord's own actions in connection with matters having nothing to do with the lease or the leased premises. This limitation on the landlord's coverage is typically imposed by the endorsement to the tenant's CGL policy that adds the landlord as an additional insured. The proper extent of this limitation, however, can vary and is the subject of dispute.

The spectrum of limitations ranges from the restrictive to the permissive. On the restrictive end, some additional insured endorsements limit the landlord's coverage as an additional insured to vicarious liability suffered by the landlord for occurrences arising out of the tenant's negligence. This means that if the occurrence giving rise to the third party's suit against the landlord does not arise out of the tenant's negligence, the landlord will not be an additional insured for purposes of the claim. Tenants may initially like this approach, but they should keep in mind that they will likely be exposed to the extent that their separate obligations to indemnify and defend the landlord under the lease extend to matters other than those arising out of the tenant's negligence. Many indemnity provisions require the tenant to indemnify the landlord for the landlord's own partial or sole negligence, and the CGL insurer would not respond in these situations if the tenant were not also at least partially negligent. There can also be situations in which a landlord is subject to a third party suit even though neither the tenant nor the landlord was negligent, and here again the vicarious liability additional insured status would not respond. (The “contractual liability” coverage under the tenant's CGL policy may still respond even if additional insured status is not available, but this coverage is more limited and is subject to exceptions that are beyond the scope of this article.)

Additional Insured Status: Language to Use

The ISO's approach to additional insured status for landlords is more permissive. For leased buildings, the ISO CG 20 11 endorsement (titled “Additional Insured ' Managers or Lessors of Premises”) is standard. This adds as additional insureds the parties specified in the endorsement, but stipulates that this status is “only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to [the tenant]” and described in the endorsement. Notably, this limitation does not restrict coverage to vicarious liability, and instead it makes the endorsement's description of the premises determinative. It is normally a simple matter to describe the actual leased premises. Most litigation about this endorsement focuses on whether the limitation applies to lease-related incidents occurring near but outside the leased premises, such as in common areas or parking lots. Courts tend to read the “ arising out of” language broadly, to construe additional insured coverage for areas outside the actual leased premises, but the decisions are not uniform.

A careful landlord, then, will want the lease to address the scope of its additional insured coverage. One way to do this is to require the tenant to name the landlord and any other specified parties (the landlord's officers, property manager, etc.) as additional insureds “using ISO additional insured endorsement form CG 20 11 or an equivalent acceptable to the landlord.” (For unoccupied land, the ISO form CG 20 24 is appropriate, instead of form CG 20 11.) The provision could add something like the following, to ensure coverage for incidents near but not within the actual leased premises: “If the additional insured endorsement restricts the coverage afforded to the additional insureds to liability arising out of the ownership, maintenance or use of premises described in the endorsement, then the tenant shall cause the description of the premises in the endorsement to include the Premises [as defined in the lease], any parking areas or other common areas at the Property [i.e., the landlord's property within which the Premises is located] that the tenant or its invitees are authorized to use, and any other areas of the Property outside the Premises that the tenant or its invitees are authorized to use temporarily.” (A careful tenant, on the other hand, might object to the inclusion of areas outside the actual leased premises, on the grounds that the “arising out of” language in the CG 20 11 endorsement is already sufficiently broad.) Finally, a landlord wanting to take a belt-and-suspenders approach could specifically prohibit a vicarious liability limitation on additional insured status, using language such as the following: “Tenant shall ensure that the coverage afforded to the additional insureds includes coverage for the additional insureds' own acts related to the Premises, and does not limit their coverage to liability arising from the tenant's negligence.” A landlord will also want to obtain a copy of the actual additional insured endorsement, to confirm for itself that these requirements are fulfilled.

Another standard requirement that a landlord will always want to specify is that its additional insured status under the tenant's CGL must be primary and noncontributing with any other insurance or self-insurance available to it or any other additional insureds. This will help ensure that the tenant's CGL will apply first in the case of an occurrence covered by both the tenant's CGL policy and the landlord's CGL. But it is inappropriate to add that parties must be named as additional insureds under CGL “as their interests may appear,” because this refers to the insurable interest requirement that is relevant only for property insurance.

Problems with One-Requirement-Fits-All

Parties drafting lease insurance requirements should keep in mind that each type of insurance ' CGL, workers compensation and employers liability, auto, property, etc. ' has its own peculiarities, and it rarely makes sense to apply to all policies requirements that are appropriate for CGL. It is not unusual, for example, for leases to provide that all of the tenant's insurance coverages must be endorsed to name the landlord as an additional insured. The problem is that additional insured status, which is appropriate and essential in the CGL context, is almost always inappropriate for workers compensation and employers liability insurance, superfluous for auto policies (which generally provide automatic additional insured status for parties held vicariously liable), and appropriate only in certain cases for the tenant's property policy. Likewise, some leases provide that all of the tenant's policies must be primary and noncontributing with respect to the landlord's policies, even though the primary and noncontributing language is appropriate only for CGL.

Conclusion

Drafting coherent and enforceable lease insurance requirements, for CGL and for any other coverage, is worth the effort. Despite the technicality and seeming boilerplate nature of these provisions, they go to the heart of the risk allocation in a lease. Parties would do well to consider carefully whether their lease insurance requirements are appropriate, sooner rather than later.

Aaron Potter is an associate in the Chicago office of Pircher, Nichols & Meeks, a national law firm specializing in real estate matters. Phone: 312-915-3149. E-mail: apotter@pircher. com.

The insurance section of a lease is often the weakest part of what may otherwise be a very sophisticated document. A landlord generally does not want to impose obsolete or otherwise nonsensical requirements on its tenant, and a tenant generally does not want to promise to do things that are impossible. But both can regularly be found in lease insurance provisions.

Leasing attorneys tend to be at a double disadvantage with respect to insurance requirements. On the one hand, they may lack the knowledge of insurance policies and industry practices needed to create coherent and appropriate contractual insurance requirements. On the other, they may address this problem by relying on the client's insurance broker or consultant. But these professionals are not usually attorneys, and the fact that they have a more detailed knowledge of insurance does not mean that they will know how best to describe in a contract what should be required.

This article aims to address some of these problems and suggest solutions. It focuses particularly on commercial general liability insurance (CGL) requirements because this is a fundamental coverage that poses a number of challenges to the drafter.

Describing the Scope of CGL Coverage

Unlike some other types of insurance, such as property insurance, CGL policies are largely standardized. That is, although parties are free to choose their form of CGL policy and to modify any form they use, most businesses in the United States use a CGL policy form promulgated by the Insurance Services Office, Inc. (ISO). Drafters of insurance requirements can take advantage of this standardization.

The benchmark provided by the ISO form is useful, for example, when specifying the content of the coverage to be provided under a CGL policy. Thus, a lease that requires that the CGL must be “written on the current ISO CG 00 01 form” will thereby require the coverages provided in the standard ISO CGL form. To give a party required to carry CGL more latitude in case the party does not use the ISO policy form, the provision may also allow “an equivalent that includes coverage for premises, operations, products-completed operations, personal and advertising injury, and liability assumed under an insured contract.” Each of these coverages is provided under the standard ISO CGL policy form.

Avoiding Obsolete Terminology

In describing the insurance required of the parties, a lease should use accurate terminology. For example, leases should refer to CGL insurance by its proper name: commercial general liability insurance, or at least “general liability insurance.” Leases requiring CGL, regardless of which party carries it, should avoid obsolete names for this coverage, such as “public liability insurance,” “comprehensive general liability insurance,” or “owners, landlords, and tenants (OL&T) liability insurance.”

In the past, various coverages were excluded from the standard ISO form that are now included. Leases addressing these old ISO forms would often require the addition of the missing coverages by endorsement. This is the origin of lease insurance provisions requiring a “contractual liability endorsement” (or “broad form” contractual liability endorsement), a “broad form property damage endorsement,” a “broad form comprehensive general liability endorsement,” a “personal and advertising injury liability endorsement,” or a “host liquor liability endorsement.” All of these coverages are now included in the standard ISO form, and lease provisions requiring these endorsements can be deleted. Similarly, requirements for a “cross-liability endorsement” can be deleted, because this concern is now addressed in the “separation of insureds” provision in the standard ISO form. A party wanting to make very sure that the CGL policy has not been modified to exclude cross-liability coverage (i.e., to make sure the insurer will not refuse to provide coverage to an insured when it is sued by another insured) can add in the lease a statement that “the policy must not contain any cross-liability exclusion.”

Another antiquated but common requirement in leases is that a party must provide a specified “combined single limit” of CGL coverage. This terminology is aimed at language in the old ISO forms that provided separate limits for property damage liability and bodily injury liability. But the current standard ISO forms have abandoned this approach and this terminology, and instead provide four separate limits: per-occurrence, general aggregate, products-completed operations, and personal and advertising injury. Leases should hence avoid the obsolete term “combined single limit,” and should instead refer to a minimum per-occurrence limit (e.g., “not less than $1,000,000 each occurrence”). Alternately, if the parties want to be more specific, a lease can refer to the minimum amount of coverage for each type of limit (e.g., “not less than $1,000,000 each occurrence, $2,000,000 general aggregate, $2,000,000 products-completed operations, and $1,000,000 personal and advertising injury”). In either case, the landlord will want to add that the aggregate limit must apply on a “per-location” basis, if the tenant has more than one location.

Additional Insured Status: Scope of the Coverage

Most leases require the tenant to name the landlord as an additional insured under its CGL policy. This requirement gives protection to both the tenant and the landlord. For the tenant, it means that to the extent other provisions of the lease obligate the tenant to indemnify or defend the landlord for liability that is covered by CGL, the CGL insurer should provide this indemnity and defense on the tenant's behalf. (Note, however, that in most cases, CGL will not cover every potential claim under an indemnity provision. For example, a landlord might be indemnified for a fine imposed on the landlord due to the tenant's failure to comply with laws, and this would not be covered by CGL.) For the landlord, additional insured status provides direct recourse to the insurer's deep pocket, without the need to pursue the tenant or draw from the landlord's own CGL.

A careful landlord, however, will want to specify in the lease the scope of coverage given to it as an additional insured. The tenant, as the “named insured” under the tenant's CGL policy, is typically protected against liability for bodily injury or property damage for occurrences anywhere in the United States. When a landlord is added as an additional insured, the tenant's policy will limit the coverage thereby given to the landlord as an “insured” under the policy. Some limitation is appropriate, because without it a landlord would, like the tenant, be provided with coverage under the tenant's policy against liability for bodily injury or property damage for occurrences anywhere in the United States, even if the liability was due to the landlord's own actions in connection with matters having nothing to do with the lease or the leased premises. This limitation on the landlord's coverage is typically imposed by the endorsement to the tenant's CGL policy that adds the landlord as an additional insured. The proper extent of this limitation, however, can vary and is the subject of dispute.

The spectrum of limitations ranges from the restrictive to the permissive. On the restrictive end, some additional insured endorsements limit the landlord's coverage as an additional insured to vicarious liability suffered by the landlord for occurrences arising out of the tenant's negligence. This means that if the occurrence giving rise to the third party's suit against the landlord does not arise out of the tenant's negligence, the landlord will not be an additional insured for purposes of the claim. Tenants may initially like this approach, but they should keep in mind that they will likely be exposed to the extent that their separate obligations to indemnify and defend the landlord under the lease extend to matters other than those arising out of the tenant's negligence. Many indemnity provisions require the tenant to indemnify the landlord for the landlord's own partial or sole negligence, and the CGL insurer would not respond in these situations if the tenant were not also at least partially negligent. There can also be situations in which a landlord is subject to a third party suit even though neither the tenant nor the landlord was negligent, and here again the vicarious liability additional insured status would not respond. (The “contractual liability” coverage under the tenant's CGL policy may still respond even if additional insured status is not available, but this coverage is more limited and is subject to exceptions that are beyond the scope of this article.)

Additional Insured Status: Language to Use

The ISO's approach to additional insured status for landlords is more permissive. For leased buildings, the ISO CG 20 11 endorsement (titled “Additional Insured ' Managers or Lessors of Premises”) is standard. This adds as additional insureds the parties specified in the endorsement, but stipulates that this status is “only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to [the tenant]” and described in the endorsement. Notably, this limitation does not restrict coverage to vicarious liability, and instead it makes the endorsement's description of the premises determinative. It is normally a simple matter to describe the actual leased premises. Most litigation about this endorsement focuses on whether the limitation applies to lease-related incidents occurring near but outside the leased premises, such as in common areas or parking lots. Courts tend to read the “ arising out of” language broadly, to construe additional insured coverage for areas outside the actual leased premises, but the decisions are not uniform.

A careful landlord, then, will want the lease to address the scope of its additional insured coverage. One way to do this is to require the tenant to name the landlord and any other specified parties (the landlord's officers, property manager, etc.) as additional insureds “using ISO additional insured endorsement form CG 20 11 or an equivalent acceptable to the landlord.” (For unoccupied land, the ISO form CG 20 24 is appropriate, instead of form CG 20 11.) The provision could add something like the following, to ensure coverage for incidents near but not within the actual leased premises: “If the additional insured endorsement restricts the coverage afforded to the additional insureds to liability arising out of the ownership, maintenance or use of premises described in the endorsement, then the tenant shall cause the description of the premises in the endorsement to include the Premises [as defined in the lease], any parking areas or other common areas at the Property [i.e., the landlord's property within which the Premises is located] that the tenant or its invitees are authorized to use, and any other areas of the Property outside the Premises that the tenant or its invitees are authorized to use temporarily.” (A careful tenant, on the other hand, might object to the inclusion of areas outside the actual leased premises, on the grounds that the “arising out of” language in the CG 20 11 endorsement is already sufficiently broad.) Finally, a landlord wanting to take a belt-and-suspenders approach could specifically prohibit a vicarious liability limitation on additional insured status, using language such as the following: “Tenant shall ensure that the coverage afforded to the additional insureds includes coverage for the additional insureds' own acts related to the Premises, and does not limit their coverage to liability arising from the tenant's negligence.” A landlord will also want to obtain a copy of the actual additional insured endorsement, to confirm for itself that these requirements are fulfilled.

Another standard requirement that a landlord will always want to specify is that its additional insured status under the tenant's CGL must be primary and noncontributing with any other insurance or self-insurance available to it or any other additional insureds. This will help ensure that the tenant's CGL will apply first in the case of an occurrence covered by both the tenant's CGL policy and the landlord's CGL. But it is inappropriate to add that parties must be named as additional insureds under CGL “as their interests may appear,” because this refers to the insurable interest requirement that is relevant only for property insurance.

Problems with One-Requirement-Fits-All

Parties drafting lease insurance requirements should keep in mind that each type of insurance ' CGL, workers compensation and employers liability, auto, property, etc. ' has its own peculiarities, and it rarely makes sense to apply to all policies requirements that are appropriate for CGL. It is not unusual, for example, for leases to provide that all of the tenant's insurance coverages must be endorsed to name the landlord as an additional insured. The problem is that additional insured status, which is appropriate and essential in the CGL context, is almost always inappropriate for workers compensation and employers liability insurance, superfluous for auto policies (which generally provide automatic additional insured status for parties held vicariously liable), and appropriate only in certain cases for the tenant's property policy. Likewise, some leases provide that all of the tenant's policies must be primary and noncontributing with respect to the landlord's policies, even though the primary and noncontributing language is appropriate only for CGL.

Conclusion

Drafting coherent and enforceable lease insurance requirements, for CGL and for any other coverage, is worth the effort. Despite the technicality and seeming boilerplate nature of these provisions, they go to the heart of the risk allocation in a lease. Parties would do well to consider carefully whether their lease insurance requirements are appropriate, sooner rather than later.

Aaron Potter is an associate in the Chicago office of Pircher, Nichols & Meeks, a national law firm specializing in real estate matters. Phone: 312-915-3149. E-mail: apotter@pircher. com.