-Partners in Practice -

When was the last time you reviewed your office lease? It does not make for light reading, and if you are like most of us, it has not been out of the file since the day it was signed. Is this a big deal? Perhaps not, but circumstances change over time. It may not be a bad idea to make certain your insurance protection is still consistent with the obligations you assumed when you first moved in.

Before you start, however, it would be helpful to gain a better understanding of how two relatively obscure, but important insurance concepts apply to the terms and conditions of your lease. Both relate to the extent to which you may be responsible for damage to your landlord's property. One is fire legal liability; the other, subrogation.

Suppose, for a moment, that in hastily cleaning up after an open house someone were to drop a dish towel soaked with a volatile cleaning solvent into a wastebasket. No one notices. Several hours later fire breaks out, and before it can be extinguished a portion of your office is seriously damaged. The damage also extends to common areas of the building.

Your property loss is insured under the property coverages you carry, but what about your liability for damage to the owner's property? That portion you occupy is treated differently from that which you do not. The reason is that your general liability policy excludes coverage for property under your care, custody, and control. Most such property, your office equipment, for example, is separately insured.

Thus, although damage to the common areas of the building would be covered under (and subject to the limits of) your basic general liability insurance, damage to that portion of the building which is rented to you would not be. Insuring this latter risk requires fire legal liability protection.

Fire legal liability, simply stated, is the legal responsibility you have for fire damage to the real property of others in your care, custody, and control--property you would not normally insure under your own property policy. For coverage written on pre-1986 general liability forms, this exposure is insured in conjunction with an extended liability endorsement. Under new forms, the coverage is included in the basic policy, but the limits are not. They are shown separately on the Declarations Page under "Fire Damage." In either case, standard limits of $50,000 are provided unless higher limits are required.

Do you need higher limits? It depends on the value of the office space you occupy. It also depends on the terms of your lease. This brings us to the subrogation issue.

Insurers have a contractual right under most policies of insurance to seek to recover insured losses from those who are actually responsible--to stand in the place of the policyholder and exercise whatever rights of recovery the policyholder may have. This is known as a right of subrogation. Unless this right has been waived, the insurer of your landlord's building is in a position to mount a subrogation action against you for damage to the building arising out of your negligence.

If you are with us thus far, it may have occurred to you that each of the tenants in a building could be at risk for the value of the entire building. This is true, but it is not a mandatory state of affairs. Damage to the building is a risk the owner already insures. Damage to your property is a risk you insure. These risks can be reasonably allocated between you and your landlord through the simple expedient of a mutual waiver of the subrogation rights of your respective insurers.

This expedient can be integrated into most lease agreements without great difficulty, and there are few reasons not to attempt to do so. As long as the waiver is effected in writing, prior to a loss, most property insurers will accept it without question.

If you should decide to take a closer look at your office lease, there are a number of insurance and liability related concerns you may want to take into account. What do you look f or? Here is a checklist of common requirements which have important insurance implications:

1. What limits of liability are you required to maintain? Are they reasonable? Are you currently carrying these limits?
2. Are you required to name your landlord (or anyone else) as an Additional Insured under your policy? Has this been done?
3. Is a Certificate of Insurance required to be furnished to your landlord or to others? Has this been accomplished for the current policy year?
4. Who is responsible for insuring your leasehold improvements? If you own them, their value should be included in your business personal property limits. If they belong to the owner, the owner should be required to furnish the coverage.
5. To what extent have you assumed liability for damage to the owner's property under your care, custody, and control? Can your liability be limited to $50,000? If not, do you have fire legal liability insurance at limits adequate to protect against this risk?
6. Does your lease contain a mutual waiver of subrogation as respects damage to insured property? It probably should.
7. What additional insurance protection are you required by your lease to maintain (i.e., glass, boiler and machinery, rental value, or business interruption)? Do you have this coverage?
8. Does your lease have a provision for the abatement of rent in the event the premises are damaged by an unexpected disaster?

If all of this strikes you as a bit much, there is a simpler solution. Send us a copy of your lease. We would welcome the opportunity to review it against the insurance coverages you maintain and to let you know whether we believe those coverages to be adequate. If not, we may be able to suggest modifications to your lease that might better serve both your interests and those of your landlord.

For inquiries or problems please contact us via e-mail at Earleen Thomas or call us directly at 800-705-7742.
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