When leasing a building for your business, you have an obligation as a tenant to compensate the building owner for damage caused by your operations. It pays to be familiar with your insurance policy to assure that you have no coverage gaps or surprises in the event of a loss.
Almost every standardized commercial insurance policy provides tenants with some coverage for certain types of loss under these circumstances. This coverage can usually be found in a Commercial General Liability endorsement and is usually very limited.
Historically, the endorsement was known as “Fire Damage Legal Liability,” which explains some of the coverage limitations found in many policies. Generally, insurance protection:
- Applies only to the premises, not to contents such as furniture or stock.
- Responds to fire damage only, not water damage or other perils.
- Is provided only if the insured is legally liable. Liability assumed under a contract is not covered.
- May be limited to a specified amount, typically $100,000.
Some limitations of coverage worth considering include:
- Damage to the building could exceed the coverage limits of “Damage to Premises Rented to You”.
- Not all causes of loss may be covered. For example, a tenant’s employee damages the building while operating a forklift, which is not a covered cause of loss.
- Damage to the premises is covered but the equipment is not. For example, the tenant rents office space and equipment from a building owner and sustains a fire loss. The policy may cover the building damage, but not the equipment.
- The leasing contract could make the lessee responsible for damage to the premises, regardless of cause of loss.
To combat the shortfalls of the “Damage to Premises Rented to You,” tenants have options:
- You can purchase a Tenant Liability Endorsement. This endorsement typically provides coverage up to $1 million, and extends perils beyond fire and explosion to damages for which the insured is legally liable arising from direct physical loss or damage to premises rented to (or temporarily occupied by) the insured with permission of the owner.
- You can purchase a regular property insurance policy. This route provides broader coverage, but may duplicate limits already provided by the lessor’s policy and is usually more expensive than Tenant Liability.