If you’ve ever leased space in a commercial building, your landlord probably required you to have commercial lease insurance. But why, though? Aren’t they the ones who are supposed to be covered?
The answer is simple. Landlords want to transfer some of their risk and liability to their tenants.
If for whatever reason, you caused damage or an accident, they don’t want to shoulder financial losses alone.
Plus, they want to make sure you have enough cash to cover the rent each month. Suppose you get wiped out by a lawsuit or large medical expense. If that happens, your landlord loses out on valuable income they need to run their business.
When you have adequate business insurance coverage, it doesn't just protect you from a financial loss — it protects your landlord too. Here’s why they ask for commercial renters insurance.
What liability is your landlord responsible for?
Wondering whether your landlord is passing all the responsibility for maintaining insurance coverage onto you? It depends on the lease, says Mariah Jeffrey, real estate agent, Coldwell Banker Property Exchange.
“A lease can be structured in any way the landlord and tenant agree to,” she says. Some leases, known as triple net (NNN) leases, pass all expenses for the property to the tenant, including taxes, insurance and maintenance.
Others split the costs between the landlord and the tenant.
For example, Jeffrey has a property where she’s responsible for insuring a restroom and hallway utility closet that are common areas, plus she insures the whole building. And the tenants are responsible for carrying a policy to cover them if they are negligent.
So if someone slips and falls on the wet restroom floor, Jeffrey is liable, but if a customer is injured in a tenant’s space, the tenant would be liable.
Jeffrey has another building where she is responsible for insuring the roof and HVAC system. The tenant is responsible for insuring the rest of the property. When a hailstorm damaged the building, Jeffrey and the tenant filed two separate claims.
Jeffrey’s insurance covered the damage to the roof and the building’s two HVAC systems. The tenant’s commercial lease insurance covered the broken windows plus the carpet and business property damaged by the leaking roof.
The insurance companies paid out close to $150,000 on the combined claims.
Jeffrey also maintains liability insurance on all of her properties, including those with triple net leases, so she’s covered if someone sues her for something that happens on the property, even if she’s not responsible.
Check the lease if you ever have any doubt about what expenses you're on the hook for vs. your landlord. That's typically what an insurance company will do if you ever need to file a claim.
What types of commercial lease insurance do landlords require?
When a landlord leases space to a tenant, they’re not just trying to protect the property — although that’s obviously important. They also want to make sure you can pay the rent if you get sued or experience a disruption to your business.
Here are some of the most common commercial lease insurances your landlord may require.
General liability is usually the first type of insurance business owners purchase because it helps protect against third-party injuries and property damage. Your landlord will probably require it.
Let's say you own an auto repair shop, and a client comes to pick up their vehicle. On their way to pay for the repairs, they trip and fall on a piece of equipment you forgot to put away, injuring their shoulder. They need surgery and physical therapy.
They sue you for the cost of their medical expenses, which adds up to over $10,000.
Because you have insurance, the provider helps cover the claim, your business continues to operate as usual, and you can continue paying your rent.
But without insurance, instead of filing a claim, you have to scrape together the money or fork over your savings to pay the customer’s medical expenses. Without insurance’s help, you could fall behind on your bills, including your rent.
Commercial property insurance helps pay to repair or replace business property if it’s damaged or stolen. Jeffrey requires all her tenants to maintain this type of coverage, and here’s an example of why.
A tenant in one of her buildings runs a casino. One day, a disgruntled customer flushed a glass down the toilet, damaging the casino and the health department next door.
The casino and health department needed new flooring. Because Jeffrey's tenant had commercial property insurance, the insurer covered the cost of repairing the flooring in both locations.
But what if the casino had to close while repairs were completed and couldn't make money during that time?
Jeffrey has a plan for that too. She (and many other landlords) require her tenants to maintain business interruption coverage.
"If they have to shut down because their property flooded, insurance could cover their income for that period of time," Jeffrey says. Tenants are still able to cover their rent and the rest of their bills
NEXT includes business interruption in your commercial property insurance, so you’re covered if you have to temporarily close your business due to a covered incident.
Almost all states require business owners who have employees to maintain workers' compensation coverage. It helps pay for employee medical bills and lost wages that result from a workplace-related injury or illness.
So, why would your landlord care about that?
Without workers' comp, employees could sue you if they get sick or hurt on the job. If you have to pay for their medical expenses and lost wages out of pocket, you might not have enough cash left over to pay the rent.
Adding your landlord as an additional insured
For some landlords, seeing your certificate of insurance may not be enough. They may want you to add them to your policy as an additional insured.
Jeffrey requires her tenants to list her as an additional insured.
“We don’t want to get into a situation where [the tenant’s] property is damaged and they decide [they] just want to pocket this money and move somewhere else. We need to ensure that we're protected and get reimbursed for any damage."
Adding an additional insured does not change your coverage; it just means your landlord has protection for damage and liabilities you may bring to their property.
How NEXT helps protect small business renters
Getting commercial lease insurance to meet your landlord’s requirements is fast, easy and affordable at NEXT.
With our online application, you can apply for coverage, see your options, get a quote and purchase coverage in less than 10 minutes.
As soon as you make a payment, you'll get access to your certificate of insurance, so you can send them a copy or list them as an additional insured.
If you have questions, our licensed, U.S.-based insurance professionals are standing by to help.
Get started with your free quote today.