By Jim Hochman & David Liebman, SIOR
INSURANCE ISSUES IN INDUSTRIAL
AND OFFICE LEASES - PART 2
A LOOK AT LEASING AND CONTRACTS
In the last issue of the SIOR
Report, we highlighted several insurance provisions
in commercial leases,
including: Reasonable Limits
for Comprehensive General
Liability (CGL); Certificates
of Insurance (“COI”) and
Notice of Cancellation;
Subrogation; and Business
Interruption (BI) and Extra
Expense (EE) Insurance. In
this second part, we discuss
the Landlord’s side of the
equation, Rental Insurance
and issues that arise in the
event of a casualty loss.
1. Rental Insurance:
a. What does rental insurance cover in
the event of a casualty? Loss of Rents/
Business Interruption will replace the
Landlord’s loss of rental income resulting from the casualty.
b. Who should have this coverage? For
many landlords their significant exposure to loss of revenue is primarily “Loss
of Rents.” This then translates to the
Landlord’s “Business Interruption” limit.
It is recommended that the Landlord
carry loss of rents coverage, especially
when rent abatement clauses are granted in a tenant’s lease. Just because rent
may be abated as a result of a casualty,
mortgage payments are not suspended.
2. Landlord Insurance Issues in the
Event of a Casualty Loss:
a. What if insurance proceeds are insufficient to rebuild a partially or wholly
Replacement Cost Coverage (RC)
valuations for property insurance, by
definition, pay for what it would cost to
replicate the lost property in “today’s”
market. This coverage focuses on the
actual cost of like kind and quality of
building materials. It does not pay for
the ultimate cost an insured incurs to
actually replace or rebuild the property.
Consider and determine whether or not
it covers current labor costs as well.
b. What if the mortgage lender
claims the insurance proceeds?
If the lender is identified on the policy as
a “Loss Payee,” insurance proceeds will
either be paid to the lender or to both
the lender and the insured. It is usually
up to the lender and the insured to determine use of proceeds. For example,
if the Landlord did not carry sufficient
Loss of Rents coverage in order to cover
its tenant’s discontinued rent payments,
the Landlord may not be able to meet
its debt service obligation to the lender. Accordingly, the lender may apply
recovery first to Landlord’s failure to
keep current on the mortgage, prior to
any proceeds being applied to rebuilding or replacing the building. Adequate
coverage is paramount in order to allow
the Landlord to replace or rebuild and
stay current on its mortgage obligation.
c. What if the insurer won’t adjust
the claim in time to get started on
restoration as the lease requires?