Commercial lease insurance requirements and how to check them before signing

Why leases include insurance terms

A commercial lease allocates risk between the landlord and the tenant. The landlord wants confidence that injuries in the tenant’s space, damage caused by the tenant and losses to the tenant’s own property will be paid by the tenant’s insurance rather than the landlord’s.

Insurance requirements in leases are often long, detailed and drafted by the landlord’s lawyers or lender. They tend to be written for a wide range of tenants, so some requirements may be more than a small business needs or different from what its current policies provide.

Leases can run for many years. A requirement that is easy to meet today may become costly or unavailable later, which is why it pays to review the terms before signing rather than after.

Typical liability requirements

Nearly every commercial lease requires the tenant to carry commercial general liability insurance. The lease will state minimum limits per occurrence and in aggregate, and may require the aggregate to apply per location.

• The landlord, and often its property manager and lender, named as additional insureds
• Additional insured wording for managers or lessors of premises, such as the ISO CG 20 11 form or equivalent
• Primary and noncontributory coverage for the landlord
• An umbrella or excess policy to reach a higher total limit
• Liquor liability for tenants that serve or sell alcohol

Property insurance for your space

The landlord usually insures the building. The tenant is usually responsible for insuring its own business personal property, such as furniture, equipment and inventory, and often the improvements and betterments it pays for, such as build out, fixtures and finishes.

Read the lease carefully on who owns and who insures the improvements. Some leases require the tenant to insure all improvements, including those the landlord paid for. Others make the landlord responsible. The answer affects how much property coverage you need and at what value.

Many leases require property insurance on a special form basis, sometimes described as all risk, at replacement cost. Check whether your current policy meets those terms, and whether the lease requires specific coverages such as plate glass, equipment breakdown or flood.

Business income and extra expense

Some leases require tenants to carry business income coverage, which helps replace lost income and pay continuing expenses if a covered loss forces the business to close or slow down. Even when the lease does not require it, it is worth considering because rent may continue to be due under some leases after a loss.

Look at how the lease handles rent abatement after damage to the premises, and match your business income coverage period to how long it could realistically take to rebuild and reopen.

Some leases also require extra expense coverage, which helps pay the added costs of operating from a temporary location while the premises are repaired. Ask your broker how these coverages interact with the lease’s casualty and restoration clauses.

Waivers of subrogation in leases

Many leases include a mutual waiver of subrogation. Each party agrees that its property insurer will not pursue the other for covered property losses, even if the other party caused them. This keeps a fire or water loss from turning into a lawsuit between landlord and tenant.

For the waiver to work, both property policies need to permit it. Many standard property forms allow written waivers made before a loss, but confirm this with your broker. Some leases also require waivers on liability and workers compensation policies, which may need endorsements and can carry a charge.

Indemnity and insurance together

The indemnity section of a lease states who must defend and pay for claims arising from the premises. The insurance section then requires policies that help fund those promises. Read both sections together.

Broad indemnity clauses can ask the tenant to cover claims that arise from the landlord’s own negligence or from common areas outside the tenant’s control. Insurance may not cover every obligation you agree to in an indemnity clause, so it is worth having a lawyer review indemnity language that seems one sided.

Insurance during build out

If you are improving the space before opening, the lease may require builders risk insurance and may set insurance requirements for the contractors who perform the work. The landlord may also want to be an additional insured on those contractors’ policies. Ask your contractor for certificates and endorsements early, because missing paperwork can delay access to the premises or the start of rent free periods.

Other common requirements

• Workers compensation and employer’s liability for tenants with employees
• Commercial auto liability if vehicles operate on the property
• Minimum insurer financial strength ratings
• Notice to the landlord before cancellation or material change
• Certificates of insurance delivered before move in and at each renewal
• Landlord rights to increase required limits during the lease term
• Builders risk or contractor insurance requirements for tenant build out work

How to check before signing

The best time to review lease insurance requirements is when the lease is still a draft. Changes are harder to negotiate after signing, and some requirements can affect the cost of occupying the space.

• Send the insurance, indemnity, casualty and waiver sections to your broker before signing.
• List every required coverage, limit, endorsement and deadline in one table.
• Compare each line with your current policies and note gaps.
• Ask for the cost of closing each gap, so you can include it in the lease decision.
• Clarify who owns and insures tenant improvements.
• Check whether the landlord can raise required limits during the term.
• Ask your lawyer to review indemnity and waiver language.

Staying compliant during the lease

Lease insurance obligations continue for the whole term, not just at signing. Landlords and their property managers often request updated certificates at each policy renewal, and some use tracking services that flag lapses automatically. A lapse in required coverage can be treated as a lease default.

Keep a simple record of the lease requirements alongside your policies. Before each renewal, confirm that limits, endorsements and named parties still match the lease, and update the landlord’s details if the property is sold or the manager changes.

What tenants often negotiate

Landlords may agree to adjust requirements that do not fit a tenant’s business, particularly when the tenant explains why. Common points of discussion include limits that are higher than typical for the size of the space, requirements for coverages the business does not need, notice of cancellation terms that insurers will not provide, and indemnity language that extends to the landlord’s own negligence.

Ask for changes in writing and keep the final lease with your insurance records. At each renewal, check that your policies still meet the lease terms, especially if the lease allows the landlord to increase requirements over time.