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 premises and the activities of the business owner. It identifies who must purchase the insurance, what coverage is required, limits of insurance to carry and each party’s rights to waive or not waive subrogation for losses.

Older lease agreements often make the tenant responsible for their negligence resulting in fire loss to the ‘occupied’ leased premises. The business 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 or fire legal liability, is an important provision under a commercial general liability (CGL) policy when a business is leasing either the building or partial space within a building. It provides coverage for property damage due to a fire to the leased or rented premises as a result of the insured’s negligence.

Why is this so important to review?

This is a frequently overlooked coverage. Insurance professionals are likely to focus on the major coverages within the CGL policy. Fire damage legal liability is giveback coverage and limited. It covers only fire losses, and applies only to the leased or rented premises ‘occupied’ by the tenant. Limits are 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, but there are options. For example, if a tenant is leasing 25 percent of a building valued at $400,000, a limit of $100,000 is reasonable; if the tenant is leasing the 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, which requires the tenant to insure the building. This normally requires tenants to pay for other expenses like real estate taxes, maintenance, repairs and utilities. A tenant leasing a portion of space doesn’t have this option.

The tenant’s agent can also provide legal liability coverage on the property 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 subrogation clause into the lease agreement in favor of the tenant. This risk reduction method waives the subrogation clause in the landlord’s insurance policy so it doesn’t apply to claims against the tenant. The landlord’s carrier cannot seek restitution from the tenant for fire loss. A waiver of subrogation is the most desired method of transferring the risk back to the property owner and least costly 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 the business owner’s (tenant’s) negligence. If the business owner has an umbrella policy, this limit will go above it for additional coverage. The umbrella limit, however, doesn’t go over the fire legal liability limit, which could create 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 agent at Kemmons Wilson Insurance Group to prevent future financial problems.

Consult with your Experts in the Unexpected

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