RESPONSIBILITY FOR DAMAGE OR INJURY IN COMMERCIAL LEASES AND THE ROLE OF INSURANCE
One of the more controversial and confusing elements of a commercial lease negotiation involves the allocation of responsibility for negligence of landlord and tenant. Frequently, after careful allocation of responsibility to insure the property, the parties either inadvertently undermine that allocation by their treatment of responsibility to indemnify or at least waste time (and attorneys’ fees) negotiating such provisions.
A lease provides the tenant with the exclusive right to possess the leased premises. As a result, most commercial leases allocate full responsibility for what happens within the premises to the tenant. That responsibility includes a requirement to indemnify the landlord if some third party sues over a claim that is the tenant’s responsibility.
The lease virtually always includes an exculpatory provision absolving the landlord for liability for these injuries that have been allocated to the tenant. California law, however, limits the scope of exculpatory provisions, and these limitations are typically reflected in the lease provisions: they will not excuse the landlord from liability for claims arising out of landlord’s fraud, willful injury, violation of applicable law, or gross negligence.
The landlord, on the other hand, is typically responsible for property damage or personal injuries in the common areas of multitenant buildings caused by the wrongful acts or omissions of landlord.
The lease also allocates responsibility to insure the property, and, logically enough, the responsibility to insure tracks the responsibilities for risks. Thus, the tenant must insure its own premises and personal property; the landlord must insure the common areas and the structure itself.
The landlord usually undertakes to maintain comprehensive (broad form or special form) casualty insurance for the building and improvements, while the tenant is obligated to maintain casualty insurance for its personal property and fixtures. Tenant is also required to maintain commercial general liability insurance on an occurrence basis covering personal injury and property damage arising, directly or indirectly, from tenant’s operations at the property. Landlord will be required to be named as an “additional named insured” or an “additional insured” on the tenant’s liability policy.[1]
The insurance provisions also typically include mutual waivers of subrogation and requirements that the insurance policies maintained by the parties also waive subrogation. A waiver of subrogation means that, for instance, if the landlord is somehow involved in a loss in the tenant’s space, the tenant’s insurer must pay the tenant’s claim – but cannot recover from the landlord. Without the waiver of subrogation, both parties would, as a practical matter, need to insure the premises, for fear that the other party’s insurer would attempt to assert claims waived by the parties in the lease.
As a result, despite tenant’s exculpation and indemnification of landlord, upon a casualty resulting from tenant’s negligence resulting in damages to the elements of the property insured by the landlord, landlord’s casualty insurance policy will cover the damage claims. Similarly, tenant’s liability insurance should cover third party claims for injury or damage in or about the tenant’s premises. To the extent that injury or damage arises from wrongful acts or omissions of landlord, if the landlord is an additional named insured under tenant’s liability policy, it will be covered by tenant’s liability policy. If not, landlord’s policy should apply.
Frequently, though, the parties begin to tinker with the basic loss allocation rules of the lease to introduce concepts of blameworthiness. But the insurance allocations should apply regardless of blameworthiness: if tenant has insured a risk and has coverage, there is no need to have a claim against a negligent landlord. Likewise, if the landlord has insured a risk and has coverage, there is no need to have a claim against a negligent tenant. If any losses exceed the amount of coverage, the party at fault should be responsible for the loss not covered. In all other cases, a party who has complied with the insurance clauses should be protected against further liability. Poorly drafted leases seeking to impose liability based upon fault can be interpreted in a manner inconsistent with the parties’ allocations of insurance responsibility.
[1] An “additional named insured” can make a claim under the policy for claims arising from its own acts. An “additional insured” can only make claims arising from acts of the named insured, and in such circumstances the landlord should maintain its own liability insurance to protect itself against third party claims.
VIEWS EXPRESSED ARE THE PERSONAL VIEWS OF THE AUTHOR AND DO NOT REPRESENT THE VIEWS OF ROBERT THORNBURGH, KIDDER MATHEWS, LOCKE LORD LLP, ITS PARTNERS, EMPLOYEES OR ITS CLIENTS. FURTHERMORE, THE INFORMATION PROVIDED BY THE AUTHOR IS NOT INTENDED TO BE LEGAL ADVICE AND DOES NOT CREATE AN ATTORNEY-CLIENT RELATIONSHIP.
