An agent asks, "How does a tenant protect himself against the building owner (or the owner's carrier) who is seeking to recoup the cost of reconstruction to the building in excess of the Fire Damage Legal limit, assuming the tenant was legally liable for damage caused by fire? Do I interpret correctly that an umbrella will exclude excess coverage under the property CCC exclusion? Is the only alternative to increase the Fire Damage Legal under the primary policy to a limit equal to the replacement cost of the building? Or is the exclusion commonly deleted from an umbrella?"

The bottom line is that CGL FDLL coverage just doesn't cut it anymore with regard to lease provisions. There was a time when most leases made, at worst, the tenant responsible only for fire damage to a rented building, just as rental car companies used to make renters responsible only for collision damage to a rented vehicle.

Times have changed. Today, most leases make the tenant responsible for most any damage to the building, just as rental car contracts make renters responsible for most any loss to the vehicle. And, just as more rental car companies now sell Loss Damage Waivers rather than Collision Damage Waivers, agents should look to sell coverages other than FDLL to address the exposures of tenants responsible for building damage.

In addition, tenants (and landlords) should seek to include mutual waivers of subrogation in the lease agreement. Here is an observation from one VU faculty member:

Here is how leased property should be insured, starting with the most proper technique:

1.  The landlord should insure the building and pass the expense along to the tenant. Frankly, any building owner that entrusts an insurance or risk management program to the tenant is a "non-genius."

2.  The tenant should procure direct property insurance and include the interest of the landlord. The superiority of this method compared to the next one is that it doesn't require that the tenant be legally liable (many, if not most, leases no longer require this either).

3.  The tenant should use the Legal Liability Coverage Form CP 00 40 to insure the property. This form includes not only Fire Legal Liability, but also driving a tenant's vehicle through a wall, water damage, etc. Limits need to be adequate to address leased property values, loss of rents, etc.

4.  The tenant may rely on the CGL's Fire Damage Legal Liability coverage, including the appropriate increased limit. Realize that this is essentially a single-peril coverage for a peril that is increasingly the cause of a minority of claims.

Another faculty member opines:

1.  Require that the landlord maintain insurance on the property.

2.  Require mutual waivers of subrogation.

3.  Require mutual release for all damages for which insurance is maintained or is required to be maintained, including any self-insured portion (deductibles, SIRs, coinsurance penalties, inadequacy of insurance, etc.).

4.  Carve out the exposure within any indemnification.

Bill Wilson (bill.wilson@iiaba.net) is director of the Big “I” Virtual University. To read the entire article including a link to another article which discusses waivers of subrogation for each major line of commercial insurance, click here. If you do not know your Big “I” website user name and password, e-mail logon@iiaba.net to request your login.