A chain store tenant or a tenant that’s a big company with several offices may demand the right in the lease to insure its space under a blanket insurance policy. This kind of policy insures all of the tenant stores or offices under one policy. It is acceptable to agree to this demand, but a landlord should spell out the requirements that the tenant’s blanket insurance policy must satisfy. Otherwise, the landlord may find out after a fire, flood or other casualty that there is not enough coverage under the policy to pay to repair the damage.
1. Both Landlord and the Tenant Can Benefit. Allowing the tenant to have a blanket insurance policy can benefit both you and the tenant. The tenant may find it simpler and cheaper to get a blanket insurance policy. And the blanket policy may also work best for the landlord. In fact, in certain situations it can actually provide greater insurance coverage than the landlord may require in the lease.
2. Set Certain Requirements in Lease. There are risks associated with the blanket insurance policy so it’s crucial that the landlord set certain requirements that any blanket insurance policy the tenant gets must satisfy the requirements.
3. Policy Complies with Other Insurance Requirements. It’s a good idea to reaffirm that the blanket insurance policy must meet all of the other insurance requirements landlord sets out in the lease. That means that all the other insurance clauses such as the one requiring proof of coverage, will still apply. Otherwise the tenant might mistakenly think that it doesn’t have to meet the other requirements because it got a different type of policy.
4. Endorsement Identifies Space. The landlord should require proof that the space is covered under the blanket policy. To get this proof, require the tenant to get an endorsement attached to its policy that specifically identifies the space as covered under the policy.
5. Minimum Guaranteed Coverage Per Space. Also require the tenant to get a set minimum guaranteed coverage amount for the space. Landlord should be sure that in the unlikely event that all the tenant stores or offices burn down simultaneously, the damage to landlord’s space will be fully covered. To do this, require that the endorsement attached to the policy set this minimum coverage.
6. Insurer Waives “Pro Rata Distribution Requirement”. Some insurers place a restriction on blanket insurance policy called a “pro rata distribution requirement”. This restriction works like a co-insurance penalty, penalizing the insured if the blanket insurance coverage is improperly used. If damage to the space exceeds the pro rata share of the blanket insurance policy, the tenant will be treated as if it underinsured the space. The insurer can charge a penalty when reimbursing the tenant for its claim. If the penalty is steep enough, it could leave the tenant unable to pay to repair the damage.
To avoid this problem, require the tenant to get a policy with an endorsement that waives any pro rata distribution requirement.
The following is proposed lease language:
Blanket insurance. Any insurance required of Tenant under this Lease may be furnished by Tenant under a blanket policy so long as and provided such policy:
a. Strictly complies with all other terms and conditions contained in this Lease; and
b. Contains an endorsement that: (i) identifies with specificity the particular address of the Premises as being covered under the blanket policy; (ii) provides a minimum guaranteed coverage amount of $____________ per occurrence for the Premises; and (iii) expressly waives any pro rata distribution requirement contained in Tenant’s blanket policy covering the Premises.
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