Addressing Insurance in Your Commercial Lease

If you’re planning on leasing a new space for your small business, you know that you’ll need to carefully review a potential new lease. Most commercial tenants and landlords are focused on such terms as the amount in rent that the tenant will pay, what responsibilities either the tenant or landlord will have for maintaining the premises or common areas, and whether any work will need to be done on the leased space prior to move-in. Another critical issue that parties must address during the lease negotiation process is liability. Every commercial lease contains an indemnity clause outlining the tenant and landlord responsibilities for third party claims and often claims between the landlord and tenant. Every lease also addresses the topic of insurance—what types of coverage are required, and which party will pay for it. Those insurance clauses are designed to fund the indemnity obligations. Read on to learn more about addressing insurance coverage in a commercial lease and contact an Illinois real estate attorney with additional questions.

What types of insurance coverage might be required?

The insurance requirements in a commercial lease will vary depending on the nature of the business that will be occupying the space. The greater the exposure to potential third-party claims from use of the space, or for contamination of or damage to the space, the higher the limits of the insurance coverage will be. The most common forms of insurance that may be required or covered by a commercial lease agreement are:

Property

Coverage for damage to the property itself and property held in the leased space. In some cases, especially a multitenant building, a landlord will cover all property insurance on the building. In a single-unit building, the tenant may cover the property insurance. It is important for landlords and tenants to address which party has the duty to rebuild after destruction of property, and whether (and from where) proceeds will be made available to conduct the rebuilding. Usually both tenants and landlords will have some responsibility for insuring the premises. The landlord will be responsible for the overall building and the tenant will be responsible for at least some causes of potential damage to the tenant’s space.

Liability: Protection against claims made by third parties, such as a customer injured on the leased premises.

Many business owners also choose to carry Business Interruption Insurance. This insurance takes the place of income that was lost while a property was untenantable and covers the cost of expenses incurred by the tenant’s business during the period it couldn’t operate. A lease rarely requires this type of insurance, but many tenant business owners choose to carry it for their own protection.

Most leases require that the landlord be named an “additional insured” on the tenant’s property and liability insurance policies. This means the landlord’s losses on the rented premises are treated the same as the tenant’s losses. This is an important provision to ensure that the insurance company promptly pays the claims. Without such a clause, valuable time will be lost while the insurance company sorts out which party suffered the loss and which losses are covered by the insurance policy. This problem increases when both the landlord and tenant have their own policies with different insurance companies.

By hiring a seasoned Chicago commercial real estate attorney, you can seek expert guidance on negotiating favorable terms in your commercial lease and ensuring that resolution of an insurance claim will go as smoothly as possible after a loss.

For seasoned, professional help negotiating the terms of a commercial lease in the Chicago area, contact the Hoffman Estates commercial real estate attorneys at MacDonald, Lee & Senechalle for a consultation at 847-310-0025, with additional offices in Des Plaines at 847-298-5030.