A Little Knowledge Goes a Long Way: A High-Level Overview of Liability Insurance Provisions in a Retail Lease Agreement

Some of the most overlooked sections in a lease for a retail shopping center are the insurance provisions. Even experienced asset managers and general counsel often have a number of questions surrounding insurance provisions in shopping center leases. Despite their seemingly lackluster nature, well-drafted insurance provisions in a contract between a landlord and tenant can be extremely important when it comes to mitigating potential exposure and protecting a shopping center's assets.

Required Coverage

Nearly every shopping center lease agreement contains provisions requiring the tenant to procure and maintain liability insurance for itself continuously throughout the term of the agreement. There is significant protection for a landlord in having its retail tenants bound by lease provisions that require the tenants to maintain insurance coverage for themselves.

It is prudent for a landlord to spell out each type of insurance coverage it requires its retail tenant to maintain. First and foremost, a landlord has an interest in making sure its tenant has commercial general liability insurance that will cover both bodily injury and property damage. If a customer injured while on the tenant's premises is compensated by the tenant's policy, this reduces the exposure for a claim against the property owner.

Many leases further require the retail tenant to maintain workers' compensation insurance to the full extent required by the applicable law; employer's liability insurance; automobile liability insurance; excess insurance coverage; and even comprehensive cyber liability insurance (as more landlords and tenants are incorporating technology into everyday use). By requiring a retail tenant to insure itself, the landlord is making sure the tenant has protection in the event it is sued and will not necessarily face financial hardship that may negatively affect the tenant's ability to pay rent.

In addition to the types of coverage, it is standard that the lease agreement specifies the minimum coverage limits a retail tenant must maintain. For example, a lease may require the tenant to carry commercial general liability insurance of not less than $1 million per occurrence and in the aggregate, and additionally require that the tenant also purchase insurance coverage in excess of the underlying liability insurance requirements. The minimum amount of coverage a property owner should require depends upon the potential exposure. The landlord should evaluate what kind of exposure it may face in order to determine the minimum amount of coverage the landlord should require of the retail tenant. The landlord's insurance broker is often a good resource for determining appropriate limits.

Finally, a savvy retail tenant often asks that the insurance requirement be reciprocal, so that the landlord is required to maintain insurance coverage in the same minimum amounts. This ensures that the landlord has its own coverage in the event both the landlord and tenant are named as parties in a suit.

Additional Insured Provisions

In addition to requiring a tenant to maintain insurance for itself, a well-drafted lease agreement will also require that the tenant make the landlord an additional insured on its policies — most importantly the commercial general liability policy.

When a landlord leases space to a tenant, the landlord bears a risk that someone could be injured on the rented property while visiting the tenant. If the injured party sues the shopping center owner, the landlord (or its insurer) might be liable for damages. Standard additional insured provisions will cover the landlord under the tenant's policy for any liability the landlord faces that is derivative of the negligence of the named tenant. Because coverage as an additional insured is derivative of the tenant's negligence, it is critical that the landlord maintain its own liability coverage as lessor regardless of the insurance maintained by the tenant.

If a shopping center has coverage as an additional insured, and subsequently, the shopping center faces potential exposure that may arguably be derived from the tenant's negligence, the shopping center should notify the carrier to take advantage of the additional insurance coverage. In a lawsuit, in addition to the shopping center's obligation to disclose its own insurance coverage, the shopping center may also have an obligation to disclose coverage as an additional insured. Either way, view that coverage as an asset, and do not let it be forgotten.

Waiver of Subrogation

A waiver of subrogation provision is one of the most misunderstood, yet critical, provisions in a commercial lease — and one that is mutually beneficial for both the landlord and the tenant. When one party pays a claim that is caused by another, that party is entitled to seek recovery of the amount paid from the other party. In the context of insurance, if the insurer pays a claim on behalf of its insured, it acquires the insured's right to seek recovery from the responsible third party. Waivers of subrogation in lease agreements are often reciprocal and each party agrees to give up subrogation rights against the other in the event of a loss.

The purpose is to prevent one party's insurance company from pursuing a lawsuit against the other party to the lease agreement after it has paid on a claim. The inclusion of a waiver of subrogation clause in a lease is beneficial because it can prevent potentially expensive and time-consuming litigation after the loss. For instance, imagine a scenario in which a customer trips and falls due to defective flooring in a tenant's leased space. The customer sues the landlord, who makes a claim on its insurance, and the insurer defends the claim and pays a settlement on the landlord's behalf. Without a waiver of subrogation, the landlord's insurance company may be able to sue the tenant in an effort to recover the monies paid on behalf of the landlord. Such a suit could be detrimental to the tenant's financial viability, which would be harmful to a landlord who depends on the tenant to pay rent.

Conversely, if a landlord's negligence causes the customer to slip and fall, and the tenant is sued, a waiver of subrogation stops the tenant's insurance company from suing the landlord after having paid the claim on behalf of the tenant. If the landlord loses, they might raise the rent to cover the additional cost. As a result, the waiver of subrogation can be beneficial to both parties. It does not limit the amount of insurance proceeds available; it limits the insurance company's ability to pursue the party with whom you have entered into a lease agreement.

Most general liability insurance policies contain cooperation provisions that prevent the insured from doing anything that will impair the insurer's ability to recover. However, most policies provide that a written waiver of subrogation, agreed to in advance of a claim, is not a violation of the policy. Be sure to check your policy before agreeing to a waiver of subrogation.

The Certificate of Insurance

It is prudent to require that the party with the obligation to maintain insurance or to add the other party as an additional insured prove that they did indeed do so. The landlord typically asks that the tenant provide a certificate of insurance (COI) indicating that they are maintaining each of the policies required under the terms of the lease. It is important to understand that the COI itself is not as meaningful as the policy. To the extent the party provides you with a COI, it is a representation that they have insurance coverage; however, the certificates themselves are for information only. A certificate is not a contract of insurance and does not change the policy terms. They are also drafted by insurance agents of the policyholder and not the insurer underwriting the risk. Therefore, a shopping center should approach a COI with caution and include a lease provision that allows it to obtain and review the actual policy itself.

Analysis

Navigating the complexities of insurance provisions in lengthy lease agreements can be challenging. In addition to understanding the insurance provisions in a shopping center lease agreement, it is always a good idea to consult your insurance broker and insurance counsel when reviewing or drafting such insurance provisions.

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Lisa A. Weixelman is a senior partner and Amber J. Simon is an associate in the Kansas City offices of Polsinelli.