Effects of Commercial Leases on Property Losses

Leases are an integral part of the investigation process when it comes to property claims, but the process can get bogged down if the leases are poorly worded.

Trying to decipher ambiguous lease terms that have varying duties to maintain and repair can be cumbersome, according to Gilbert Tongarelli, national general adjuster with CNA Insurance.

Peter J. Hood, lead coverage attorney with Nielsen, Zehe & Antas’ property coverage practice group, agrees.

“In my opinion, leases are often very poorly drafted when it comes to addressing insurance related issues with terms that are relevant to the insurance industry,” said Hood.

Tongarelli and Hood, who spoke on the subject at the recent Property Loss Research Bureau (PLRB) national conference, held in Boston, provided tips on relevant lease terms adjusters should examine during a property loss investigation:

• Indemnification/indemnity agreements;
• Ownership of improvements/betterments;
• Repair and maintenance;
• Subrogation;
• Rent abatement;
• Term of the lease and the options;
• Rent amount;
• Risk shift/insurance procurement;
• Activities that can be conducted on the leased premises;
• Assignment of the lease.

Hood recommended obtaining the lease upon or before an adjuster’s first visit with the insured so the issues that may arise can be addressed as early as possible.

According to both experts, there can be a problem determining what name to put on the check. Policies may identify the parties to a lease in different ways. When it comes to property insurance, Hood differentiated a loss payee as one who is generally only entitled to be named on a check as opposed to an additional insured who may have rights to make and pursue a claim for certain losses under the policy.

With respect to the policy, only the named insured has a right to make changes to the policy. An additional insured has limited rights, but usually can’t make changes to the policy.

Hood said the terms of the lease don’t necessarily dictate the terms of the policy. He said a general rule is that the policy terms will prevail as to the coverage and rights between the parties; however, there are many exceptions.

According to Hood, both the lease and the policy should be reviewed together to determine whether the parties in the lease and on the policy are one in the same. He said that leases don’t attach to the insurance policy, don’t obligate the insurer to indemnify for all losses and do not dictate duties between property insurers. Identifying inconsistencies between the two contracts early can help avoid gaps in the expectations of the various parties that can arise as the loss adjustment progresses.

Both emphasized that adjusters should work to understand the landlord-tenant relationship and their motives behind the various issues involved in the reconstruction.

Hood said that insurable interest and financial interest are arguably different and often misunderstood. The case law often seems contradictory. In general, insurable interest is a requirement in purchasing insurance or being a party to a policy – it establishes a basis for which a right to a claim under the policy might arise. It doesn’t say that it is the loss actually suffered.

Financial interest, on the other hand, is defined by some as the actual attachment or measurement of insurable interest at the time of loss.

According to the panelists, in a rental situation an insurable interest may be created in the lease by a party’s duty to repair and duty to maintain insurance.

In the majority of states, indemnity agreements that absolve another for their negligence are not valid because one cannot shift responsibility for one’s own negligence.

According to Hood, subrogation waivers are often upheld; however, there are ways to overcome them, including:

• Public safety, statute and code violations;
• Material breach of the lease;
• Third party claims;
• Gross negligence.

Though a subrogation waiver may exist for one party, the panelists point out that contribution between other jointly or severally liable tortfeasors and other insurers may still exist.