The Forgotten Coverage: Fire Legal Liability

Fire can wreak havoc on commercial property, yet fire legal liability coverage is often forgotten.

August 19, 2022
Real Estate

The Forgotten Coverage: Fire Legal Liability

Fire can wreak havoc on commercial property, yet fire legal liability coverage is often forgotten. If you area business owner leasing space, it’s time to pull out your lease agreement and review the insurance clause – especially the fire damage legal liability.

The purpose of a contract is risk management, which is why it defines the obligations and benefits of each party — risk acceptance and avoidance issues.  One of the most overlooked items within a property lease contract is the fire legal liability insurance clause.

What is the purpose of the insurance clause in a lease agreement?

The fire legal liability insurance clause establishes the rights and obligations of each party with respect to insurance covering leased premisesand the activities of the business owner. It identifies who must purchase the insurance, what coverage is required, limits of insurance to carry and eachparty’s rights to waive or not waive subrogation for losses.

Older lease agreements often make the tenant responsible for theirnegligence resulting in fire loss to the ‘occupied’ leased premises. Thebusiness owner is, therefore, liable for damage to real property in his or her care, custody or control.

What exactly is fire damage legal liability?

Fire damage legal liability, also known as damage to rented premises orfire legal liability, is an important provision under a commercial generalliability (CGL) policy when a business is leasing either the building orpartial space within a building. It provides coverage for property damage due toa fire to the leased or rented premises as a result of the insured’snegligence.

Why is this so important to review?

This is a frequently overlooked coverage. Insurance professionals arelikely to focus on the major coverages within the CGL policy. Fire damage legalliability is giveback coverage and limited. It covers only fire losses, andapplies only to the leased or rented premises ‘occupied’ by the tenant. Limitsare usually written at $100,000 or less, but you can increase the limit up to$1 million for a nominal charge.

How is coverage determined?

It’s always difficult to know what limit to show on the policy, butthere are options. For example, if a tenant is leasing 25 percent of a buildingvalued at $400,000, a limit of $100,000 is reasonable; if the tenant is leasingthe entire building, he or she is underinsured.

How can you insure for this exposure?

There are several coverage options for this exposure:

First, you can amend the lease to a triple net lease agreement, whichrequires the tenant to insure the building. This normally requires tenants topay for other expenses like real estate taxes, maintenance, repairs andutilities. A tenant leasing a portion of space doesn’t have this option.

The tenant’s agent can also provide legal liability coverage on theproperty policy by endorsement, which can be written on an all risk or special(not just fire damage) form for broader coverage.

Another option is for the landlord to insert a waiver of subrogationclause into the lease agreement in favor of the tenant. This risk reductionmethod waives the subrogation clause in the landlord’s insurance policy so itdoesn’t apply to claims against the tenant. The landlord’s carrier cannot seekrestitution from the tenant for fire loss. A waiver of subrogation is the mostdesired method of transferring the risk back to the property owner and leastcostly to tenants.

What if the tenant causes damage to other partsof the building?

The property damage limit under a CGL policy covers damages to ‘other’parts of the building not occupied by the tenant for loss by fire due to thebusiness owner’s (tenant’s) negligence. If the business owner has an umbrellapolicy, this limit will go above it for additional coverage. The umbrellalimit, however, doesn’t go over the fire legal liability limit, which couldcreate problems.

A periodic review of lease agreements is a key part of risk management,so be sure to share these documents and discuss these exposures with your agentat Kemmons Wilson Insurance Group to prevent future financial problems.

Consultwith your Experts in the Unexpected

Kemmons Wilson Insurance Group is hereto help you assess the risk your business faces and tailor insurance policiesand risk management tools that can mitigate the damages of a fire and otherunexpected events. Contactus today to learn more.