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Triple Net Lease: The Problems With Leaving Insurance Up To the Tenant

What issues might come up if a property owner does not carry their own property and liability insurance because, based upon the triple net lease, the tenant must provide all of this insurance for the landlord?
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triple net lease: the problems with leaving insurance up to the tenant

Q: A property owner does not carry their own property and liability insurance because, based upon the triple net lease, the tenant must provide all of this insurance for the landlord. What problems might the owner face if they don't have any insurance written in their own name?

Response 1: I have always advised against the triple net lease because the owner has absolutely no control over the insurance. I don't care if the owner is named as the lender's loss payee, mortgage clause, additional insured, or whatever. All it takes is for the tenant to stop or forget to pay the insurance and the owner is out of luck. A canceled policy is canceled for everyone—no matter what interest they have.

My suggestion is for the owner to carry the property and lessors risk and the tenant to carry a CP 00 40 property legal liability policy on the entire building with the landlord as an additional insured. Unfortunately, it takes a knowledgeable attorney to be able to word the lease in such a way that it would make the CP 00 40 primary for the negligence of the tenant. At least that way the owner can subrogate and recoup all or part of their property loss and be defended as an additional insured as long as the insurance is in force. Plus, when the tenant's policy is voided or cancelled, the landlord still has their own coverage.

Response 2: First, what ongoing proof does the owner have that the proper coverage is in force?

Second, what form is used to list the owner as an insured? There is one form that lists the owner as a named insured for the building on the property coverage.

Third, no matter what additional insured endorsement has been issued for the CGL policy, it will not give the owner named insured status. It is vital that they carry a CGL for the possibility that the tenant's CGL does not cover them for any specific loss.

The best practice would be for the owner to carry the coverage and have the tenant pay the premium to the owner.

Response 3: Any insured that allows someone else to buy their insurance is a fool. What happens if the tenant doesn't pay, the policy is cancelled as a result, and then a loss happens? No coverage. What happens if the tenant burns down the building on purpose to pay off his bank loan? No coverage. 

A triple net lease that allows the landlord to buy their own coverage and bill the tenant is the best option.

Response 4: With my clients who are property owners, we arrange insurance for the property, business interruption, lessors risk liability and other coverages that might be appropriate, and bill the cost back to the tenant. That way the owner maintains control of the rebuild and loss adjustment process should a loss occur. The tenant insures their own property, boiler and machinery, business interruption and liability risks, and other areas.

Response 5: I've had the misfortune of seeing a number of triple net lease claims with terrible outcomes for both the owner and tenant. The owner assumes their interest is protected under the lease and the tenant's insurance program. Unfortunately, it often doesn't work out that way. 

Here are five reasons why:

1) Triple net lease arrangements are typically for a single structure and often insured specifically. If we assume a total loss, there is an enormous debris removal expense—which is limited under a specific limit building policy. 

2) Triple net leases typically involve larger structures and business interruption limits are often 12 months. 

3) The lease may not require the interest of the owner in the business interruption coverage. 

4) There can be major differences of opinion as to adequate property or liability limits following a loss. 

5) These agreements are long-term. Property values change and exposures change. 

Both the owner and tenant need to review the insurance at least annually and agree the coverage is satisfactory to all parties. I've seen large post-loss disputes go on for four or five years. 

Response 6: There are many issues for building owners who don't have their own coverage under a triple net lease. An article I wrote several years ago addresses the topic, “Insurance Requirements in Lease Agreements Can Be Tricky."

The building owner can still be sued for anything that happens on the property, including a tenant's dog biting someone, an assault on the premises, and so on. All that the injured third party, or even the tenant, needs to allege is that the owner was negligent. Without coverage, the building owner has no defense or indemnity.

There are also challenges on the property side, depending on several factors. Is the policy in force? How coverage rich is the policy purchased by the tenant? What if the tenant must have protective safeguards, such as Ansul systems, but fails to maintain them?

The only upside to a triple net lease is cost savings to the building owner … until a loss occurs.

Be sure you thoroughly explain this to your client and get a written disclaimer for this or any declination of coverage. If they still want to leave it up to the tenant to obtain their insurance coverage, the No. 1 question to ask yourself is: “Is this a client I want?"

This question was originally submitted by an agent through the Big “I" Virtual University's (VU) Ask an Expert service, with responses curated from multiple VU faculty members. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.

This article is intended for general informational purposes only, and any opinions expressed are solely those of the author(s). The article is provided “as is" with no warranties or representations of any kind, and any liability is disclaimed that is in any way connected to reliance on or use of the information contained therein. The article is not intended to constitute and should not be considered legal or other professional advice, nor shall it serve as a substitute for obtaining such advice. If specific expert advice is required or desired, the services of an appropriate, competent professional, such as an attorney or accountant, should be sought.

Friday, June 9, 2023
Commercial Lines
Virtual University