WHEN THE LEGAL LIABILITY
COVERAGE FORM IS
The dilemma of leased building versus leased space
By Paul Martin, CPCU
When an organization leases a building or space in a building, they have many things to consider regarding loss to that building during the insured’s occupancy. Is the tenant responsible for insuring the building? A lease agreement can create an insurable interest in the non-owned building if the landlord requires it of the tenant. If so, how should the building be valued? Again, a look at the lease itself may dictate the valuation. It may require replacement cost. Or perhaps, only the actual cash value of the building.
What if the lease makes it clear that the landlord will insure the building and the tenant will insure their business personal property, including any improvements and betterments they may have added to the interior? If so, the property insurance arrangements can be fairly straightforward using standard Insurance Services Office (ISO) forms such as the CP 00 10 Building and Personal Property Coverage Form with the CP 00 90 Commercial Property Conditions.
The Conditions form contains the language regarding subrogation in the Transfer of Rights of Recovery Against Others To Us condition. This condition outlines when an insured may waive subrogation in favor of others, including a tenant. The condition states that the insured may waive subrogation if done in writing prior to the loss, or after a loss for subsidiaries, parent organizations, someone insured on the policy, or if they are a tenant.
An agent’s dilemma
These kinds of questions came up in a conversation with an agent not long ago. The agent had a client who had recently taken over a lease from another organization (a sublease) for some old and rather large warehouse space that would be valuable for the expansion of the customer’s business operations. The problem arose when the agent asked his client about the original lease details and the obligations of the parties to purchase insurance.
The customer said that he was fairly certain the owner of the building was insuring it, based upon the word of the previous tenant. The agent was concerned about facing so much uncertainty. He and his client didn’t want to have to insure a multi-million-dollar building for replacement cost if they didn’t have to. Who would?
The agent was aware of the fire coverage built into his customer’s Commercial General Liability (CGL) policy under the Damage to Premises Rented to You, but recognized that the limit of $500,000 would be grossly inadequate to replace such a large building, and it covered fire only negligently caused by the tenant. He asked, “Can that be increased?” The conversation turned at this point when I asked, “Have you considered using the Legal Liability Coverage Form?” He had forgotten all about the form and what it was designed to do. The education then started.
The ISO Legal Liability Coverage Form CP 00 40 can be a great tool to overcome concerns
about damage to leased space, but many agents aren’t aware of its value.
The Coverage Form details
ISO’s Legal Liability Coverage Form CP 00 40 can be a great tool to overcome concerns about damage to leased space, but many agents aren’t aware of its value. The form’s insuring agreement promises to pay sums the insured is legally obligated to pay because of a direct physical loss to the landlord’s property, and including any loss of use. The loss must be the result of an accident and arising from a Covered Cause of Loss, which are described in the ISO Cause of Loss Forms – Basic, Broad, and Special.
It is typically used to insure the building, but it also can be used to insure business personal property of the landlord. An appropriate limit is selected by the insured and the coverage is rated using standard property rates, but here’s the good part: Normal building property rates based upon the Cause of Loss Form selected apply, but then a factor of .25 is applied to the building premium and a factor of .50 is applied to business personal property, if any.
Damage to Premises Rented to You
As the story with the agent shows, the fire legal liability coverage provided in the Commercial General Liability policy frequently can be inadequate. Specifically, because the ordinary Occurrence limit of the CGL is unavailable due to the Coverage A exclusions, and the fact that a separate, often lower limit applies to loss by fire only if the lease is longer than seven days (see Damage to Premises Rented to You limit and exception to Exclusion j). The Legal Liability Coverage Form helps the agent and the customer pick the limit they need to protect themselves.
So, it’s not just this one agent’s situation where the Legal Liability Form can help. Any tenant uncertain if subrogation is waived in their favor in the lease should consider the Legal Liability option. Or if not addressed in the lease, if there is doubt whether or not the landlord would choose to waive subrogation after a loss. And, the value of the building can be fully insured if they don’t.
The Legal Liability form also provides liability protection similar to the CGL in that the company will defend the tenant insured if they are pursued by the landlord in litigation and pay all of the defense costs associated with the claim. The form provides several coverage extensions: one that expands insured status to individuals in a way similar to the way the CGL provides automatic insureds status; and there are extensions that provide limited coverage for newly acquired organizations and newly acquired properties.
The conditions of the form are what most agents would expect. The perils and exclusions found in the Cause of Loss form options should also be familiar to most agents.
A special tool
The agent I spoke with expressed concerns that he was facing a serious E&O risk by not insuring his customer as best as he could. After the call, he felt much better knowing there was a coverage option that did exactly that. The CP 00 40 Legal Liability Coverage Form should be a tool in the toolbox of every professional agent who wants to protect their customers.
Paul Martin, CPCU, is director of academic content at The National Alliance for Insurance Education & Research headquartered in Austin, Texas. Paul works to develop, maintain, and deliver quality educational programs for the organization. Paul has over three decades in the insurance and risk management industry.