5 Ways to Give Lessors More Protection and Less Risk
By: Will Jones
In September last year, 45% of U.S. employees worked from home either all (25%) or part of the time (20%), according to a Gallup poll. These figures were unchanged from remote working rates in July and August, signaling that U.S. companies’ return-to-office plans remain either on hold or permanent.
From malls to office space, the way commercial buildings are being used is changing and levels of occupancy can vary, which is creating coverage gaps for lessors. However, before a building becomes vacant or changes in use, there are several ways that agents can provide value to their lessor clients to ensure they are covered.
Here are five ways agents can provide more protection:
1) Review contracts. The leasing agreement between lessor and lessee is an important consideration. “If I’m going to sell a policy, I need to make sure that it meets the contractual requirements of what’s in the lease,” says John Dustin, president of J.E.D. Insurance & Financial Service Agency in Foxborough, Massachusetts, and a Strategic Insurance Agency Alliance member. “A lot of agents say, ‘That’s none of our business—we just sell the policies.’ But if I’m trying to help a company be solvent and profitable, I should be helping them with their contracts and make sure what I sell with them dovetails to what they need.”
With a triple net lease, which is common in commercial real estate, the tenant agrees to pay the property expenses, such as real estate taxes, building insurance and maintenance, in addition to rent and utilities. But when the tenant’s premium jumps up because it’s vacant, “they’re going to be aggravated, even though the lease contract is holding them to it,” Dustin notes.
However, unless you are an attorney, providing contractual assistance should be approached with caution. “Too much advice outside of the insurance requirements or scope does get into possible errors & omissions issues,” says Claire McCormack, supervisor and senior underwriter, commercial lines, Big “I” Markets.
2) List the lessor as an additional insured. Lessors may also be advised to require their tenants to list them as an additional insured on the tenant’s policy, provide a waiver of subrogation and a 30-day cancellation notice, “so that building owner can ensure that their tenants are maintaining coverage,” says Joshua Lipstone, vice president, ISU-Lipstone Insurance Group in Cary, North Carolina.
“The benefit of the waiver of subrogation endorsement—more formally known as the Waiver of Transfer of Rights of Recovery Against Others to Us—is that it provides further transfer of risk from the building owner to the tenant,” Lipstone explains. “It is another way to protect the building owner from a claim if such were to arise in the future.”
In regard to the 30-day cancellation notice, this will notify the building owner if one of their tenants has their property and liability policy canceled due to underwriting reasons, which allows the building owner more time to notify the tenant to obtain a new policy. As a result, the building owner minimizes the likelihood that a tenant is uninsured.
3) Loss of income. Naturally, lessors are leasing their property to generate income. Some are paying a mortgage, too. But when a lessor faces a reduction in income due to a loss of tenants from a covered loss, they need business income coverage—and agents can help determine the right amount of coverage.
“If it’s a stated value in the policy, they could apply coinsurance to it or they’re going to make you justify your loss of earnings,” Dustin says. “If it’s actual loss sustained, you’re just going to take the hit of that loss of income.”
It must be a covered cause of loss, which means a covered “peril” and not excluded. One example Dustin cites are virus exclusions. During the pandemic many buildings also had restrictions from local and civil authorities, which also limited coverage depending on the form.
4) Vacancy permit endorsement. Depending on the carrier, agents may not need to purchase an entirely different policy to insure a building that has become vacant.
“The vacancy permit endorsement adds the coverage back that is lost when a building has been vacant,” Lipstone says. “Sometimes, vandalism and sprinkler leakage may not be included. With the vacancy, you do lose coverage, but the insurance companies do give you the ability to add it back through endorsements.”
5) Communication. Requiring a tenant to provide updates on how a property is being used to the landlord, who must update the agent, who must update the underwriter, can seem like a game of telephone. However, it is the most vital component of ensuring coverage is maintained and is relevant to the risks within the tenancy.
“Communication between agents and clients doesn’t always occur,” Dustin says. “At my agency, we try to do a renewal review at least annually, and we try to get the rent rules and the tenant listing because that’s another thing that can change.”
“And then you need to communicate with your underwriter to make sure you are advocating for the insured and passing along the information,” Dustin adds.
“When it comes to risk management, the biggest mistake is not talking with the insured enough,” Lipstone agrees.
Will Jones is IA editor-in-chief.
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