<b><i>In the Spotlight:</i></b>Three Insurance Provisions That Should Not Be Overlooked

Some of the most important, but often underappreciated, elements of a commercial real estate lease are the insurance provisions. Attorneys may spend hours negotiating and drafting expense clauses, use provisions and offset rights, but often ignore the insurance provisions as mere “boilerplate.” However, although claims on insurance sections are rarely implemented, the reality is that a poorly drafted insurance section can have severe detrimental effects and significant cost implications for a client. Three commonly included, and also commonly misunderstood, provisions in commercial real estate lease insurance sections are: 1) the 30-day notice provision; 2) the additional insured provision; and 3) the waiver of subrogation provision. The three may seem very different and seemingly unrelated, but they play an important, inter-related role in the interaction of commercial lease agreements and insurance policies. A better understanding of each of these provisions, and their nuances and applications, can prove useful to lawyers negotiating leases, and can provide greater coverage for clients, potentially saving them from incurring significant losses.

30-Day Notice Provision

Typical insurance provisions in commercial real estate leases require that insurance policies maintained by both landlord and tenant contain clauses requiring the insurance company to provide 30 days' advanced notice to the certificate holder prior to modifying or terminating the policy. A typical notice provision may read as follows:

All policies shall contain a provision that Landlord and Tenant will be given a minimum of thirty (30) days' written notice by registered mail by the insurance company prior to cancellation, termination or change in insurance.

In theory, requiring this minimum written notice should ensure that the other party is on notice of a possible change or termination of insurance coverage so that it can take action to avoid any gap in coverage. Advanced notice of termination or change in insurance coverage is invaluable to both landlords and tenants. In practice, however, recent changes to ACORD forms and insurance companies' practices have resulted in the effective reduction or elimination of the 30-day notice of termination or modification.

In previous years, the ACORD 25 Certificate of Liability Insurance (the standardized Certificate of Liability Insurance form) specifically provided that the issuing insurer “endeavor” to provide the insured party with a designated number of days' written notice prior to cancellation of a policy before its expiration date. However, this form was recently modified. The most current version of the form still designates that the insurer endeavor to give notice, but no longer allows for a specification of a period in which such notice shall be provided. However, most states allow for an endorsement that, for little to no cost, modifies the cancellation provisions in the insurance policy and provides for 30 or 60 days' notice to the insured, depending on the length of time that the policy has been effective.

While this endorsement gives the policy holder the right to advanced notice of a change, it does not extend to the other party to the lease. Typically, insurance companies will only provide notice under the endorsement to the designated primary insured party, which would not help a landlord or other additional insureds. A potential solution is to request specifically that the party to the lease that is not listed on the insurance policy be specifically included in this endorsement. This is uncommon, and the likelihood of obtaining this specific detail to an endorsement will be determined on a case-by-case basis. As a result, this approach will likely only be useful with large, more heavily negotiated leases. A more practical solution to account for the lack of overlap between the insurance policy and the lease is to modify the standard notice provision of a lease to effectively create an overlap between the two documents. An example of such language is:

All insurance policies entered into by Landlord and Tenant shall contain a specific endorsement requiring that the insurance company will provide a minimum of 30 days' written notice to the insured party by registered mail prior to cancellation, termination or change in insurance. If available, the party to this Lease Agreement that is not the primary insured shall also be specifically added to this endorsement and shall be provided the aforementioned notice by the insurance company. In the event that such specific endorsement is not available to the uninsured party, the designated insured party shall, not later than 3 days after receipt of notice of cancellation or change from the insurance company, share the notice with the party not named on the policy or in the endorsement.

This modified 30-day notice provision not only accounts for recent changes in ACORD forms and what is actually available to insureds, but also provides some assurance that the party not named on the insurance policy will receive meaningful notice of any specified changes to an insurance policy, and, therefore, will remain aware of the status of insurance on the property.

Additional Insured

Virtually all form leases will require that the landlord be specifically added as an additional insured party on a tenant's insurance policies. This is requested by landlords because it helps to minimize the problems associated with determining specifically who and what is covered under the tenant's insurance policy, and it prevents tenants from using insurance proceeds for purposes other than what the lease contemplates.

Tenants resist the request for a variety of reasons, ranging from administrative hassle to additional cost, but landlords should insist, as insurance companies seem willing to ' and may even prefer ' adding landlords as additional insureds for a small fee (as low as $100). Note that the addition of the landlord as an additional insured can be accomplished in several ways. First, a landlord can be specifically added as an additional insured on the tenant's policy. This approach remains the best way to ensure that the landlord is adequately protected. Second, a similar, yet less administratively burdensome approach is to simply require that the tenant obtain insurance policies that contain “Blanket Additional Insured Where Required By Written Contract” provisions. These provisions vary from policy to policy, but generally specify that landlords are automatically added as insureds under the insurance policies when tenants have agreed in a written contract to provide those parties coverage as additional insureds. Additionally, many policies now have blanket additional insured or extension of coverage endorsements that may be obtained and attached to the policy.

A typical additional insured provision incorporating the above considerations might read as follows:

Tenant agrees to name Landlord, other Landlord Affiliates and, if Landlord requests, Landlord's mortgagee as additional insured(s) on Tenant's Commercial General Liability Insurance on a primary, non-contributory basis for ongoing and completed operations. If Tenant is unable to specifically name Landlord or other Landlord Affiliates as additional insured(s) on Tenant's policies, then Tenant shall require that such policies contain a 'Blanket Additional Insured Where Required By Written Contract' provision, or an endorsement from the insurance provider that effectively adds Landlord to Tenant's policies.”

Importantly, a landlord must ensure that it has received sufficient evidence of the appropriate and effective addition of the landlord to the tenant's policy. For example, rather than adding landlords to their policies through one of the above-mentioned methods, tenants are increasingly directing landlords to a general insurance policy referenced on their company websites, and suggesting that landlords are covered under such policy. At first glance, this may seem to be a viable option for adding the landlord as an additional insured. However, its enforceability remains questionable. With the availability of more certain options, the general insurance policy approach should be avoided.

Waiver of Subrogation

Last, the waiver of subrogation remains an important element of insurance provisions. A mutual waiver of subrogation is a significant risk mitigator, and mutually benefits both landlord and tenant. This provision ensures that when one of the parties to the lease suffers a loss that is to be reimbursed by insurance, both parties will turn to the other's respective insurance provider for compensation rather than suing the responsible party. As with the specific addition of the landlord as an additional insured on the tenant's policies, the specific inclusion of landlords or tenants in waiver of subrogation language in insurance policies is commonly accompanied by resistance from the party receiving such request. A sample waiver of subrogation provision is as follows:

All casualty coverage insurance carried by Landlord or Tenant shall provide for waiver of subrogation against Landlord, and other Landlord Affiliates, Tenant and Tenant Affiliates on the part of the insurance carrier. Evidence of the existence of the waiver shall be furnished by either party to the other party on request.

Except for workers' compensation policies, most insurance companies will be willing to include “Blanket Waiver of Subrogation When Required By Written Contract” provisions. Like the blanket waiver for additional insured provisions, this waiver should be able to be included in both landlords' and tenants' insurance policies without significant administrative hassle. A copy of such blanket waiver provision should be requested by both parties as evidence of the waiver's existence.

Conclusion

Lawyers and clients alike can benefit by better understanding the interactions and consequences of these insurance-related lease provisions and their interaction with insurance policies. However, follow-up on their implementation is equally as important as the provisions themselves. Attorneys should emphasize to clients the need to enforce the provisions, collect the required certificate and, most importantly, to check that the certificate complies with the requirements of the lease. Although the above provisions only comprise a small portion of otherwise lengthy commercial real estate leases, a better understanding of their importance and how they are actually applied, coupled with more diligent follow-up on their implementation, will decrease the chances of your client running into unfortunate and potentially substantial consequences.

Christina Olson is an associate in the Chicago office of Seyfarth Shaw LLP, and focuses her practice on commercial real estate transactions. Reach her at [email protected].

Some of the most important, but often underappreciated, elements of a commercial real estate lease are the insurance provisions. Attorneys may spend hours negotiating and drafting expense clauses, use provisions and offset rights, but often ignore the insurance provisions as mere “boilerplate.” However, although claims on insurance sections are rarely implemented, the reality is that a poorly drafted insurance section can have severe detrimental effects and significant cost implications for a client. Three commonly included, and also commonly misunderstood, provisions in commercial real estate lease insurance sections are: 1) the 30-day notice provision; 2) the additional insured provision; and 3) the waiver of subrogation provision. The three may seem very different and seemingly unrelated, but they play an important, inter-related role in the interaction of commercial lease agreements and insurance policies. A better understanding of each of these provisions, and their nuances and applications, can prove useful to lawyers negotiating leases, and can provide greater coverage for clients, potentially saving them from incurring significant losses.

30-Day Notice Provision

Typical insurance provisions in commercial real estate leases require that insurance policies maintained by both landlord and tenant contain clauses requiring the insurance company to provide 30 days' advanced notice to the certificate holder prior to modifying or terminating the policy. A typical notice provision may read as follows:

All policies shall contain a provision that Landlord and Tenant will be given a minimum of thirty (30) days' written notice by registered mail by the insurance company prior to cancellation, termination or change in insurance.

In theory, requiring this minimum written notice should ensure that the other party is on notice of a possible change or termination of insurance coverage so that it can take action to avoid any gap in coverage. Advanced notice of termination or change in insurance coverage is invaluable to both landlords and tenants. In practice, however, recent changes to ACORD forms and insurance companies' practices have resulted in the effective reduction or elimination of the 30-day notice of termination or modification.

In previous years, the ACORD 25 Certificate of Liability Insurance (the standardized Certificate of Liability Insurance form) specifically provided that the issuing insurer “endeavor” to provide the insured party with a designated number of days' written notice prior to cancellation of a policy before its expiration date. However, this form was recently modified. The most current version of the form still designates that the insurer endeavor to give notice, but no longer allows for a specification of a period in which such notice shall be provided. However, most states allow for an endorsement that, for little to no cost, modifies the cancellation provisions in the insurance policy and provides for 30 or 60 days' notice to the insured, depending on the length of time that the policy has been effective.

While this endorsement gives the policy holder the right to advanced notice of a change, it does not extend to the other party to the lease. Typically, insurance companies will only provide notice under the endorsement to the designated primary insured party, which would not help a landlord or other additional insureds. A potential solution is to request specifically that the party to the lease that is not listed on the insurance policy be specifically included in this endorsement. This is uncommon, and the likelihood of obtaining this specific detail to an endorsement will be determined on a case-by-case basis. As a result, this approach will likely only be useful with large, more heavily negotiated leases. A more practical solution to account for the lack of overlap between the insurance policy and the lease is to modify the standard notice provision of a lease to effectively create an overlap between the two documents. An example of such language is:

All insurance policies entered into by Landlord and Tenant shall contain a specific endorsement requiring that the insurance company will provide a minimum of 30 days' written notice to the insured party by registered mail prior to cancellation, termination or change in insurance. If available, the party to this Lease Agreement that is not the primary insured shall also be specifically added to this endorsement and shall be provided the aforementioned notice by the insurance company. In the event that such specific endorsement is not available to the uninsured party, the designated insured party shall, not later than 3 days after receipt of notice of cancellation or change from the insurance company, share the notice with the party not named on the policy or in the endorsement.

This modified 30-day notice provision not only accounts for recent changes in ACORD forms and what is actually available to insureds, but also provides some assurance that the party not named on the insurance policy will receive meaningful notice of any specified changes to an insurance policy, and, therefore, will remain aware of the status of insurance on the property.

Additional Insured

Virtually all form leases will require that the landlord be specifically added as an additional insured party on a tenant's insurance policies. This is requested by landlords because it helps to minimize the problems associated with determining specifically who and what is covered under the tenant's insurance policy, and it prevents tenants from using insurance proceeds for purposes other than what the lease contemplates.

Tenants resist the request for a variety of reasons, ranging from administrative hassle to additional cost, but landlords should insist, as insurance companies seem willing to ' and may even prefer ' adding landlords as additional insureds for a small fee (as low as $100). Note that the addition of the landlord as an additional insured can be accomplished in several ways. First, a landlord can be specifically added as an additional insured on the tenant's policy. This approach remains the best way to ensure that the landlord is adequately protected. Second, a similar, yet less administratively burdensome approach is to simply require that the tenant obtain insurance policies that contain “Blanket Additional Insured Where Required By Written Contract” provisions. These provisions vary from policy to policy, but generally specify that landlords are automatically added as insureds under the insurance policies when tenants have agreed in a written contract to provide those parties coverage as additional insureds. Additionally, many policies now have blanket additional insured or extension of coverage endorsements that may be obtained and attached to the policy.

A typical additional insured provision incorporating the above considerations might read as follows:

Tenant agrees to name Landlord, other Landlord Affiliates and, if Landlord requests, Landlord's mortgagee as additional insured(s) on Tenant's Commercial General Liability Insurance on a primary, non-contributory basis for ongoing and completed operations. If Tenant is unable to specifically name Landlord or other Landlord Affiliates as additional insured(s) on Tenant's policies, then Tenant shall require that such policies contain a 'Blanket Additional Insured Where Required By Written Contract' provision, or an endorsement from the insurance provider that effectively adds Landlord to Tenant's policies.”

Importantly, a landlord must ensure that it has received sufficient evidence of the appropriate and effective addition of the landlord to the tenant's policy. For example, rather than adding landlords to their policies through one of the above-mentioned methods, tenants are increasingly directing landlords to a general insurance policy referenced on their company websites, and suggesting that landlords are covered under such policy. At first glance, this may seem to be a viable option for adding the landlord as an additional insured. However, its enforceability remains questionable. With the availability of more certain options, the general insurance policy approach should be avoided.

Waiver of Subrogation

Last, the waiver of subrogation remains an important element of insurance provisions. A mutual waiver of subrogation is a significant risk mitigator, and mutually benefits both landlord and tenant. This provision ensures that when one of the parties to the lease suffers a loss that is to be reimbursed by insurance, both parties will turn to the other's respective insurance provider for compensation rather than suing the responsible party. As with the specific addition of the landlord as an additional insured on the tenant's policies, the specific inclusion of landlords or tenants in waiver of subrogation language in insurance policies is commonly accompanied by resistance from the party receiving such request. A sample waiver of subrogation provision is as follows:

All casualty coverage insurance carried by Landlord or Tenant shall provide for waiver of subrogation against Landlord, and other Landlord Affiliates, Tenant and Tenant Affiliates on the part of the insurance carrier. Evidence of the existence of the waiver shall be furnished by either party to the other party on request.

Except for workers' compensation policies, most insurance companies will be willing to include “Blanket Waiver of Subrogation When Required By Written Contract” provisions. Like the blanket waiver for additional insured provisions, this waiver should be able to be included in both landlords' and tenants' insurance policies without significant administrative hassle. A copy of such blanket waiver provision should be requested by both parties as evidence of the waiver's existence.

Conclusion

Lawyers and clients alike can benefit by better understanding the interactions and consequences of these insurance-related lease provisions and their interaction with insurance policies. However, follow-up on their implementation is equally as important as the provisions themselves. Attorneys should emphasize to clients the need to enforce the provisions, collect the required certificate and, most importantly, to check that the certificate complies with the requirements of the lease. Although the above provisions only comprise a small portion of otherwise lengthy commercial real estate leases, a better understanding of their importance and how they are actually applied, coupled with more diligent follow-up on their implementation, will decrease the chances of your client running into unfortunate and potentially substantial consequences.

Christina Olson is an associate in the Chicago office of Seyfarth Shaw LLP, and focuses her practice on commercial real estate transactions. Reach her at [email protected].