How Much Do You Know About Property Leases and CGL Exclusions?

Lease agreements routinely include provisions that impose liability on the tenant for repairing damage to leased premises from any cause, not just fire.

If the tenant’s insurance is deficient, the landlord, the landlord’s insurance company or both may sue the tenant to recover the costs of damage to the property. In addition, the landlord may pursue payment of two or more years unpaid rent as liquidated damages if the tenant defaults on the lease.

This exposure is very serious. A critical component of the commercial general liability policy is coverage for an insured legally liable for damaging the property of a third party. But exclusion j(1) in the CGL form says in part:

“This insurance does not apply to:

j. Damage To Property

“Property damage” to:

1. Property you own, rent, or occupy,…”

An exception to this exclusion does not apply to premises rented to the named insured for seven or fewer consecutive days, or to the contents of those premises. Another exception to fire damage to rented premises is subject to a different set of coverage provisions and a separate limit of insurance.

Above, the terms “own” and “rent” are easy to grasp. But what about “occupy”? Many nonprofit organizations occupy space other parties furnish.

The coverage excludes “property damage” to owned, rented or occupied property. The responsibility for purchasing commercial property insurance often appears in the “Damage and Destruction” section of a lease, instead of the “Insurance Requirements” section. Either the landlord or the tenant can insure their obligations for leased property using commercial property policies.

Many property leases do not include a mutual waiver of subrogation. Other leases have the tenant waive subrogation under the tenant’s insurance, but the landlord’s insurance company can recover its loss from the tenant.

Consider the following example: A tenant causes major damage to the space they occupy, plus adjoining space. The damage to the tenant-occupied space totals $500,000, while the damage to the space beyond the occupied area is $500,000.

The lease in question does not include a mutual waiver of subrogation. The landlord’s insurance company pays the landlord the cost of all repairs and loss of rent. The landlord’s insurance company then pursues recovery of its paid loss against the tenant. The tenant’s CGL carrier agrees to pay damage to property beyond the leased space, but excludes all damages to space the tenant rents or occupies.

That’s why a mutual waiver of subrogation in property leases is so important. Agents need to explain why the lessee, renter or occupier needs to know if a mutual waiver of subrogation is in place. In its absence, the insured needs the Legal Liability Coverage form (CP 00 40), which protects the insured for negligent damage to the space they rent or occupy. It can also insure damage to personal property in their custody.

Note, however, there is no coverage for liability assumed by contract, such as a tenant’s obligation to insure interior improvements which the landlord installs under an “allowance” or which another party installs.

John O. Eubank, CPCU, ARM, is president & CEO of Professional Insurance Education, Inc. in Nashville, Tennessee. Jim Mahurin, CPCU, ARM, has provided fee-only risk management and insurance consulting services to insureds since 1984.