Commercial buildings are great investments generally requiring lower maintenance and higher returns than residential rental properties but come with their own unique risks. As the landlord, you can manage these risks with a good lease and strong insurance requirements.
The insurance requirements in a commercial lease can include a balance of affordability and flexibility while still protecting you, the landlord against the risks they face. Insurance requirements within a lease can be modified to accommodate and be flexible with tenants. Here are a few of the essential and non-essential components:
COMMERCIAL GENERAL LIABILITY:
- Commercial General Liability will protect against bodily injury and property damage claims such as a slip and fall. The tenant’s commercial general liability coverage adds a layer of protection between you and the tenant’s customers. With correct requirements, their policy will respond before yours.
- Commercial General Liability minimum limits should be $1,000,000/$2,000,000 and can be increased in some policies to $2,000,000/$4,000,000. The split limits mean a maximum of $1,000,000 for any one claim and a $2,000,000 maximum policy limit for the twelve-month policy period. Some companies do not offer limits of $2,000,000/$4,000,000 so if you as a landlord require the higher limits it can require your tenant to change insurance companies or add an umbrella policy for an additional cost and burden to them of around $600.00 per year.
- Medical Expense: The medical expense limit is normally $5000.00 but can be increased in some policies to $10,000.00. The purpose of this coverage is to offer payments for injury incurred on your premises for which neither you nor your tenant were responsible. An example is a slip and fall for which the premises is to code and clear of debris, indicating no negligence, but someone simply falls. In a case like this, medical expense payments as a gesture of good will can discourage the injured party from calling an attorney and seeking a higher settlement.
PROPERTY & TENANTS IMPROVEMENTS:
- Property Insurance covering full replacement of the tenant’s furniture, equipment, supplies, and any other property owned or leased by the tenant. If you fail to require this and the tenant does not insure their property they will not be able to remain in business after a loss and continue to pay you rent.
BUSINESS INCOME/INTERRUPTION:
- Business Income can be overlooked by your tenant or their insurance agent so it’s important they include a limit of at least 12 months and depending on the property you may want to consider 18 months. It can take a long time to rebuild commercial properties. Stay in Business: The Importance of Business Interruption Insurance for Utah Entrepreneurs | Anderson Insurance Group
PLATE GLASS INSURANCE:
- Almost every commercial (and residential) lease requires the tenant to replace all broken glass. To remove the gray area of who is responsible for broken glass, all leases place that responsibility 100% on the tenant.
WORKERS’ COMPENSATION:
- A responsible tenant will carry workers’ compensation insurance and that is the type of tenant you want in your building. There are different limits you may require, here’s an article explaining workers’ compensation limits: What Does Workers’ Compensation Cover? | Anderson Insurance Group
Less essential parts of the commercial lease requirements may include:
EQUIPMENT BREAKDOWN & MAINTENANCE:
- Passing the responsibility of certain systems onto the tenant will mean less maintenance for you and better care of the equipment by the tenant. Make sure the tenant is aware of and informs their agent they are responsible for this equipment. A few examples are the HVAC & water heating systems.
COMMERCIAL AUTO INSURANCE:
- You may want to require commercial auto insurance with limits of $1,000,000. What if your tenant damages your building with thier car or if they cause bodily injury in the parking lot? You could be drug into a lawsuit if the auto insurance limit is not sufficient.
UMBRELLA INSURANCE:
- A commercial umbrella policy will simply add another level of liability insurance on top of the underlying limit. The cost for each $1,000,000 of coverage adds about $600.00 per year to the cost of your tenants insurance program.
CERTIFICATES OF INSURANCE: COI’s another essential part of the insurance requirements. A COI should include the landlord as an additional insured so they are party to any damage or claim that may occur. A COI may also include language about waiver’s of subrogation and hold harmless agreements.
These insurance requirements are not meant to be part of the language of your lease agreement. Anderson Insurance Group nor any of its representatives are attorney’s nor offer any legal advice. Please consult your attorney for a commercial lease and the insurance requirements in that lease.