Legal Liability Coverage: Ensuring Protection for Leased Space

The Dilemma of Leased Building versus Leased Space


By Paul Martin, CPCU

Leasing a building or space entails various considerations for the tenant in terms of protecting the property during occupancy. Who is responsible for insuring the building? The lease agreement may require the tenant to have an insurable interest in the non-owned building, depending on the landlord’s requirements. In such cases, determining the valuation of the building becomes crucial. The lease itself may dictate whether it should be valued at replacement cost or the actual cash value.

If the lease specifies that the landlord will insure the building while the tenant is responsible for insuring their business personal property and any interior improvements, standard Insurance Services Office (ISO) forms can simplify the property insurance arrangements. The CP 00 10 Building and Personal Property Coverage Form, along with the CP 00 90 Commercial Property Conditions, can be used in such situations.

The Commercial Property Conditions form includes language regarding subrogation in the Transfer of Rights of Recovery Against Others To Us condition. This condition outlines instances where an insured can waive subrogation in favor of others, including tenants. The insured can waive subrogation in writing before or after a loss for subsidiaries, parent organizations, someone insured on the policy, or if they are a tenant.

See also  Legal Descriptions of Property in Texas: What You Need to Know

An Agent’s Challenge

These questions arose during a conversation with an agent who had a client taking over a lease for a large warehouse space. The client believed that the building was insured by the owner based on the previous tenant’s word. However, the agent was concerned about the uncertainty surrounding the insurance obligations. They did not want to bear the responsibility of insuring a multi-million-dollar building for replacement cost if it was unnecessary. Who would?

The agent was aware of the fire coverage provided by the customer’s Commercial General Liability (CGL) policy under the “Damage to Premises Rented to You” clause. However, the $500,000 limit would be insufficient to replace such a large building, and it only covered fire negligently caused by the tenant. The agent wondered if the limit could be increased. That’s when the conversation took an interesting turn.

The Power of the Legal Liability Coverage Form

I asked the agent if they had considered using the Legal Liability Coverage Form. The agent had forgotten about the form and its purpose. This led to an educational discussion.

The ISO’s Legal Liability Coverage Form (CP 00 40) can be a valuable tool to address concerns about damage to leased space. Unfortunately, many agents are unaware of its benefits. The form’s insuring agreement promises to pay sums that the insured is legally obligated to pay due to a direct physical loss to the landlord’s property, including any loss of use. The loss must result from an accident and arise from a Covered Cause of Loss, as described in the ISO Cause of Loss Forms – Basic, Broad, and Special.

See also  Is Eloping Legal? Exploring the Legalities of Eloping

While typically used to insure the building, the Legal Liability Coverage Form can also cover the business personal property of the landlord. The insured selects an appropriate limit, and the coverage is rated using standard property rates. Here’s the best part: the building premium is applied at a factor of .25 and the business personal property at a factor of .50, offering significant savings.

Overcoming Limitations of “Damage to Premises Rented to You”

As highlighted in the agent’s story, the fire legal liability coverage provided in the Commercial General Liability policy often falls short. The ordinary Occurrence limit of the CGL is unavailable due to the Coverage A exclusions, and a separate, often lower limit applies to fire damage if the lease is longer than seven days. This limitation can leave tenants exposed. The Legal Liability Coverage Form empowers agents and customers to choose the limit they need for adequate protection.

The Legal Liability Form is not only beneficial in cases like this one; any tenant unsure about subrogation waivers in the lease should consider this option. It also provides full insurance coverage for the value of the building when uncertain whether the landlord would choose to waive subrogation after a loss.

Additional Features

In addition to liability protection similar to the CGL, the Legal Liability form offers coverage extensions. It defends the tenant insured in litigation pursued by the landlord, covering all associated defense costs. The form also includes extensions that provide limited coverage for newly acquired organizations and properties.

The form’s conditions are as expected, and the perils and exclusions align with the Cause of Loss form options.

See also  Everything You Need to Know About Pennsylvania Window Tint Laws

A Valuable Tool for Agents

The agent I spoke with expressed concerns about potential errors and omissions risks if they failed to provide proper coverage for their customer. Learning about the CP 00 40 Legal Liability Coverage Form alleviated those concerns. It should be a staple in the toolbox of every professional agent committed to protecting customers.

About the Author

Paul Martin, CPCU, serves as the director of academic content at The National Alliance for Insurance Education & Research in Austin, Texas. With over three decades of experience in the insurance and risk management industry, Paul is dedicated to developing and delivering high-quality educational programs for the organization.