Blog Question on Landlords seeking the tenant to arrange the building insurance
Over the past week I have had two similar questions on how to name the landlord on a policy of insurance where the tenant is required under the lease to arrange the insurance.
Before I answer this particular question, I would like to share my views on the approach by landlords to not just have the tenant pay for the building insurance but arrange it.
To say I really do not like this approach is an understatement.
The idea came about under the guise of risk management. The typically larger organisation, often on the advice of their legal department or external legal advisers, seeking to transfer risk from their organisation onto someone else.
Having been involved in many claims where this arrangement has been in place, I have grave concerns for both the tenant and the landlord with it.
The major concern for the tenant is if the lease requires that the building be insured for full value. This pushes the risk of under-insurance onto the tenant which can create a genuine personal risk.
I would always have the landlord confirm the sum insured is adequate to try and avoid this issue.
Still on the adequacy of the insurance, if the building, typically a big value item, is under insured under an Industrial Special Risks Policy (“ISR”) it could adversely affect a claim for contents or stock for the tenant due to the application of the co-insurance clause which under an ISR Policy or some quality business pack policies is tested against all assets at the “situation and/or premises”.
Another question is, who is responsible for the policy excess/deductible in the event of a claim under the policy? This is rarely spelt out anywhere and often leads to disputes particularly if there is damage to both building and contents. Is this just another hidden risk the tenant is taking on?
In one claim I am involved in all the proceeds of the claim went to the landlord and the landlord is “slow” to pay over the amount owing to the tenant. This was due to a mistake but the insurer has walked away from the problem forcing the tenant to take legal action against the landlord, insurer, loss adjuster and broker involved. How long this will take to sort out I am not sure but it has of course left the tenant in a terrible financial position without funds to reinstate their business and now forced to fund the litigation.
Turning now to the landlord/property owner.
The whole idea of the landlord abrogating the insurance protection to the tenant is quite frankly stupid. When it is not their property, most tenants seek out the cheapest possible cover without thought of the quality of the coverage or claims service. Where does this leave the landlord who typically has no relationship with either the insurer or the broker who arranged the insurance?
Flood is just one area where consideration needs to be given as to the extent of coverage required for the particular building.
Who ensures that the insurance is paid each year and that that sum insured/limit of liability, sub-limits for things like removal of debris, extra costs of reinstatement etc are reviewed regularly and are correct?
If there is a dispute between the landlord and the tenant who is there to look after the interests of the landlord?
I have seen far too many landlords, including solicitors who were the landlords themselves be left out of pocket after a fire as a result.
You can have all the directors guarantees in the world but if the tenant(s) has no funds they have no funds so the risk goes back to the landlord.
What of the loss of rent. Most landlords forget this. If they do think of it, most leases stipulate 12 months cover. This is often completely inadequate.
I spoke early about risk transfer. The best way to transfer risk is not to the tenant but to an insurer. That is their role in the economy and in society. To my mind it is far better for the landlord to manage the insurance on the building themselves, get the cover both in sums insured and extent of coverage right based on the risk and their appetite (not the tenants) and sleep well at night.
There is always an exception to the rule.
If the landlord is relatively small and the tenant is a huge corporation with a world class insurance program with every bell and whistle known to insurance and the landlord trusts the integrity of the tenant and their insurer, risk manager and legal department to do the right thing by them and not just walk away and leave them high and dry to deal with the insurer without the benefit of their own broker working for them, then yes it may be in order to allow the tenant to arrange the insurance.
For me, with any asset. I have had to work damn hard to get it and I am not going to take the risk and abrogate the most important contract protecting my financial future, that is the insurance contract, to anyone else other than my own broker, whom I trust and myself.
Now to answer the specific question
If the insurance is to be arranged this way then the policy needs to show all the legal entities involved as named insureds but for “their respective rights and interests”.