Insurance requirements in a commercial lease

A commercial lease usually has an insurance section, often titled “Insurance” and sitting next to “Indemnity” and “Casualty,” or tucked into an exhibit at the back, and it tells you what to buy before you get the keys. The usual list is general liability at stated limits, the landlord named as an additional insured, insurance on your own equipment, stock and build-out, sometimes business income and workers’ comp, and a deadline for sending a certificate of insurance.

Read it before you sign. That sounds obvious, yet it’s easy to put off until the week you need a certificate, when the terms are fixed and the only choice left is to buy whatever the clause says.

Why the landlord wrote it this way

A landlord’s building is full of people the landlord doesn’t control: your customers, your staff, your delivery drivers. If a customer falls in your café, the landlord may well be named in the lawsuit too, and if a fire starts in your kitchen, the damage can spread into the building and the unit next door. The insurance section is the landlord’s plan for making sure your insurance, and not theirs, responds first to risks your business creates.

Read every clause that way. Each one moves some piece of risk from the landlord to you or your insurer, and the question for you is whether you can actually carry it.

New York’s state contracting guidelines, written partly for agencies that lease space to others, add the other half of the bargain: a tenant should insure its own physical assets so there’s money to repair or replace them after a covered loss.

Clause by clause

Here’s what you’ll usually find, in roughly the order it appears. The sample language below is written for this article, and the dollar figures are illustrative.

General liability limits

Leases usually require general liability, the policy that can help pay for injuries to customers and damage to other people’s property, at a stated per-occurrence limitPer-occurrence limitA per-occurrence limit is the most a liability policy will pay for all claims arising from a single incident, however many people are hurt or claims are filed.Read the definition and aggregate limitAggregate limitAn aggregate limit is the most a policy will pay for all covered claims combined during one policy period, no matter how many claims you have.Read the definition.

Sample language: “Tenant shall maintain commercial general liability insurance with limits of not less than $1,000,000 per occurrence and $2,000,000 in the aggregate.”

That pairing shows up often, but it’s the landlord’s number, so check that your policy meets or beats both figures. Look for the “damage to rented premises” limit as well, a line on your general liability for damage you cause to the space you rent, since some leases set a minimum for it, and if the lease also asks for an umbrella or excess policy on top of everything, know that it’s a separate kind of insurance with its own policy.

Additional insured and primary and noncontributory

Landlords usually want to be an additional insuredAdditional insuredAn additional insured is a person or company, such as a landlord or client, added to your liability policy so it can protect them from claims tied to your work.Read the definition on your general liability, which means your policy is endorsed so it can protect them for claims arising from your use of the space, subject to the endorsement’s terms. Leases often name more than one party.

Sample language: “Landlord, Landlord’s property manager and Landlord’s mortgagee shall be named as additional insureds, and such insurance shall be primary and noncontributory with any insurance carried by Landlord.”

Three names, three parties, and each one has to fall under the endorsement. Primary and noncontributoryPrimary and noncontributoryPrimary and noncontributory is policy wording that makes your insurance pay first for a covered claim, without asking the additional insured’s own insurance to share the cost.Read the definition means your policy pays first and the landlord’s insurance doesn’t share the cost of a covered claim. Additional insured vs. certificate holder explains why the endorsement matters more than the certificate.

Your contents and improvements

Leases usually split property in two, though the line isn’t always clean. The landlord insures the building shell, and you insure what you bring and what you build: your equipment, furniture and stock, and often the improvements you paid for, like a salon’s plumbing for shampoo bowls or a restaurant’s hood system.

Sample language: “Tenant shall insure its trade fixtures, equipment, inventory and all leasehold improvements made by or for Tenant for their full replacement cost against special form causes of loss.”

That points to commercial property insurance on your business personal propertyBusiness personal propertyBusiness personal property (BPP) is the movable property your business owns and uses, such as equipment, furniture, inventory and supplies, as covered by a commercial property policy.Read the definition. Two phrases matter. “Full replacement cost” asks you to insure for what it would cost to replace things new (see replacement costReplacement costReplacement cost is a way of valuing property losses that pays to repair or replace damaged items with new ones of like kind and quality, without subtracting depreciation.Read the definition), and “leasehold improvements,” sometimes called “improvements and betterments,” covers the build-out. If the lease says the landlord owns the improvements once they’re installed but you still have to insure them, raise it with your lawyer and make sure your policy is set up to match.

Business income

Some leases require business income coverage, which can help replace lost income and pay continuing expenses like rent after a covered loss forces you to close. From the landlord’s side, it’s how the rent keeps arriving while the space is being repaired, and the lease may name a minimum period, such as 12 months.

Waiver of subrogation

Many leases ask both sides to waive rights of recovery against each other for property losses covered by insurance. So if a fire damages your equipment and your insurer pays, your insurer can’t then sue the landlord, and the landlord’s insurer can’t come after you for the building. Mutual waivers are common and usually fair. Your policy still has to allow them, and what is a waiver of subrogation? explains how to check.

Workers’ compensation

If you have employees, the lease may require workers’ compensation as your state’s law sets it, and since those rules vary by state, the Department of Labor’s list of state workers’ compensation agencies is the place to check yours.

Certificates and notice of cancellation

Leases commonly want a certificate of insurance before you take possession and again at every renewal, and some also say your insurer must give the landlord 30 days’ notice before cancelling your policy for any reason. Stop on that last line.

The notice clause you probably can’t deliver

Here’s the clause that trips up careful tenants, because it reads like a formality and isn’t one.

ACORD’s certificate FAQ explains that a typical liability policy obliges the insurer to notify only the first named insured, which is you, of a cancellation, unless the policy has been endorsed to notify someone else. The standard ACORD 25 certificate says only that notice will be delivered in line with the policy’s provisions. Nebraska’s Department of Insurance goes further and tells agents they may not put language on a certificate saying a holder has a right to notice of cancellation that the policy doesn’t contain, and that a certificate can’t amend, extend or alter the policy in any case.

Put those together and you can see the problem. A lease clause that says “Tenant’s insurer shall provide Landlord 30 days’ prior written notice of cancellation” asks for a promise your insurer hasn’t made. Your agent can’t fix it on the certificate. The landlord’s property manager may still reject your certificate for not saying it, and you’re stuck between a lease term and a policy that don’t match.

There are two honest ways out. You can ask whether your policy can be endorsed to notify the landlord, though not every insurer will. Or, better in most cases, you can ask the landlord to change the clause to a promise you control, something like “Tenant shall notify Landlord within 10 days of any cancellation or material reduction of the required coverage.” The second version gives the landlord what it actually wants, which is to hear about a lapse quickly, and it’s a promise you can keep.

Notice the pattern here. The same mismatch shows up whenever a lease asks the certificate to do the policy’s job, and the certificate of insurance guide explains why a certificate can’t carry that weight.

One storefront lease, line by line

Can you push back on any of this?

Yes. The insurance section is part of the lease like any other, and it’s open to negotiation before you sign, especially where a term doesn’t fit the business moving in. These asks are usually reasonable:

• Matching limits to the use. A small office with few visitors is a different risk from a busy restaurant, so ask whether the required limits fit how you’ll use the space.
• Accepting a blanket endorsement. If your policy adds additional insureds automatically where a written contract requires it, ask the landlord to accept that instead of a named endorsement.
• Changing the notice clause. Swap insurer notice for a promise you can keep, as above.
• Making waivers mutual. If you waive recovery against the landlord, ask the landlord to waive against you.
• Settling who insures improvements. If the landlord will own the build-out at the end of the lease, ask who insures it during the lease.

A real estate lawyer can review the whole lease, and the insurance section earns their time when your build-out is significant. What you shouldn’t do is sign terms you can’t meet and plan to sort it out later, because the lease is what you’ll be held to when something goes wrong.

Before you sign

1. Find every insurance clause, including the indemnity and casualty sections and any exhibits.
2. List the policies required, such as general liability, property, business income and workers’ comp.
3. Write down every limit, including damage to rented premises.
4. List every party to add, with exact legal names.
5. Mark the special wording: primary and noncontributory, waivers, notice of cancellation.
6. Note the deadlines for certificates, both before possession and at renewal.
7. Ask about anything you can’t meet before signing, while it’s still a negotiation.

If you’re opening a restaurant, the restaurant insurance timeline shows where the lease fits among everything else you’ll need before opening day.