Commercial real estate can be a great investment opportunity, providing property owners with stable cash flow and steady equity growth. Las Vegas, with our generally depressed real estate pricing, has numerous opportunities for a savvy investor to purchase prime commercial properties at very low prices. To properly protect that investment, a landlord needs specialized commercial landlord insurance, often referred to as an “LRO” or “Lessors Risk Only” policy.
With the popularity of the triple net lease, we have seen a disturbing trend towards tenants insuring leased buildings for the property owner. In general, this approach to insuring commercial property provides no benefit for the landlord. In fact, it creates a host of potential coverage issues. First, let’s examine the potential pitfalls of this type of arrangement:
- By accepting coverage provided by the tenant, the landlord is essentially trusting the protection of his property to the tenant (and the tenant’s insurance broker/agent). The landlord may have very little, if any, say regarding the terms and conditions of the coverage. This means the tenant may purchase an inexpensive and inferior policy that does not adequately protect the landlord’s interest.
- Loss of rents coverage for the landlord will not be included in a policy provided by the tenant. If there was a major loss to the building and the tenant vacated (assuming the lease has an abatement clause) the property owner would have no reimbursement for the lost rental income.
- Claims caused by the intentional acts of the tenant are not covered by the tenant’s insurance policy. For example, the relationship between the landlord and tenant becomes adverse, an eviction notice is served and the tenant decides to vandalize or damage the building while vacating.
- The property insurance policy will likely contain a Protective Safeguards endorsement (e.g. fire sprinklers, alarm system). If either party fails to maintain the sprinkler or alarm system, the insurance carrier could potentially deny a claim.
- The landlord could inadvertently be subject to a co-insurance penalty if the tenant under-insured the building, even unintentionally.
- Tenants will often buy a “blanket” policy that includes coverage for building, tenant improvements, and contents under one aggregate limit. If the tenant has inadequate limits for improvements and contents, the landlord may find there is not enough coverage left to repair the building.
- Being listed as a “loss payee” on the tenant’s insurance policy does NOT provide the landlord with the same rights as the tenant. In fact, this simply means the claim settlement will be payable to both the tenant and the landlord. This could very easily create issues over what part of the claim settlement goes to the tenant versus the landlord.
- General liability coverage provided by the tenant’s policy may not be adequate to protect the landlord. This is especially true if the landlord has multiple properties owned by the same entity.
- Liability claims that involve only the negligence of the landlord may not be covered at all by the tenant’s policy. For example, an injury that occurs in a parking lot, or another common area, would likely result in a claim against only the property owner. If the tenant was not named as a defendant, the tenant’s insurance policy is unlikely to respond to the claim.
There are numerous potential scenarios we could list in which the owner of a commercial property may not be adequately covered by a tenant supplied insurance policy. We recommend that each party to the lease insure their assets separately: the landlord provides building, general liability and loss of rents coverage; the tenant provides coverage for contents, betterments and general liability for the premises. Landlords should also develop a written Best Practices plan (see our recommendations here). This should include a written lease that has an indemnification clause and tenant insurance requirements including additional insured status for the landlord.
Commercial Landlord Insurance
Commercial landlord or lessors risk policies are generally very affordable. Often, we find there is very little difference in price between tenant provided coverage and a dedicated landlord commercial property insurance policy. If the lease allows for a CAM charge, the cost of the landlord’s policy can, and should, be included.
Get a Quote: Lessors Risk Insurance
At Safeguard Insurance, we have the expertise and market access necessary to provide commercial property owners with affordable and comprehensive landlord insurance. Contact us today for a no-obligation proposal!
Safeguard Insurance is licensed to quote commercial landlord insurance in Nevada, Utah, Arizona, Idaho, New Mexico, California, Washington, and Oregon.