A commercial insured that rents a building has entered into a seven-year sales installment with the landlord to buy the building. The insured has already made major renovations, which are currently insured as business personal property. The landlord maintains the title of the building and carries building insurance for himself. The landlord's policy has not provided any coverage for the tenant. 

However, that means that each month the insured makes a payment, they increase their interest in the building but have no protection on the landlord's policy. If the agent adds property coverage for the tenant onto the tenant's existing policy, there would be two policies providing property coverage on the same building. 

The landlord has agreed to modify his policy to provide coverage for the tenant and the agent is considering the following amendments to the landlord's policy:

• The CP 12 19—Additional Insured Building Owner endorsement.
• An additional insured endorsement, either form CG 20 10 or CG 20 26.
• A 30-day notice of cancellation in favor of the tenant.
• A requirement that the landlord's liability insurance be primary and noncontributory.
• A certificate of liability and evidence of property presented to the tenant at settlement and at every renewal.

Q: Would any of these protect the insured's interest in the building?

Response 1: First and foremost, what does the sales contract state regarding who will carry the insurance and what interests will be covered by the policy? The sales contract should provide specific language, but it sounds like it doesn't.

A contract seller should protect their interests—but so should the contract buyer. Both interests covered under the same policy would be ideal if that policy contains a non-vitiation provision and properly protects both parties. 

Otherwise, if they were both listed as named insureds on the same policy, the acts of one named insured could make coverage voidable, which would result in neither named insured having the ability to collect. For example, if the seller commits arson, neither the contract seller nor the contract buyer would have insurance protection if they're listed on the same policy and there is no non-vitiation provision in the policy.

From your client's perspective, they have an insurable interest in the property. The client should obtain a package policy for property and liability that covers the full value of the building, including those major renovations. 

Also, you state you have renovations that are covered as BPP. Why? Are you classifying all they have done as improvements and betterments? Are they? It sounds like your client is not a tenant, but is rather a contract buyer. The rates for those renovations are different.

So, get the property coverage they need—property insurance where they are the named insured. Do not offer any protection for the contract seller that is not required by the sales contract. Make certain the limit is sufficient to replace the building, including all renovations. And get all the appropriate coverages: ordinance or law, equipment breakdown, optional coverages of replacement cost, inflation guard, agreed value and so on. I am hopeful you have appropriate commercial general liability for them.

Forget about asking the seller for any coverages other than those specifically stated in the sales agreement. You need to protect your client's interests.

Response 2: I suggest that the landlord's lessor's risk only policy address the building issues in two ways. First, it should include building improvements and betterments to reflect the changes by the tenant and avoid any coinsurance issues at the time of the loss.

Additionally, list the values of the tenant's alterations to the building. This may appear as double coverage, but it clearly defines who owns what during any triple-net lease-to-own disputes. Explain your reasoning to the underwriter, along with documentation to each party of the agreement.

Response 3: If your customer's ownership in the building increases with each payment, then the landlord's insurable interest is declining each time, along with the insurance proceeds. This is disadvantageous for both parties. They both should be covered under one policy, adding the phrase, “As their interests may appear."

Response 4: Much respect for your strong work on behalf of your client. You will continue to be successful due to your caring and intelligence.

However, all of your stated options are no guarantees that the landlord's policy will stay in force or carry the correct limits. Your insured's safest option is to add building coverage to their policy because they can then ensure proper limits and continuous active status. 

If a loss happens, it will be shared between both policies, assuming the landlord's is in force at the time of loss, proportional to the respective limits. Your client definitely has an insurable interest in the building, so adding building coverage should be done as soon as possible.

This question was originally submitted by an agent through the Big “I" Virtual University's (VU) Ask an Expert service, with responses curated from multiple VU faculty members. Answers to other coverage questions are available on the VU website. If you need help accessing the website, request login information.

This article is intended for general informational purposes only, and any opinions expressed are solely those of the author(s). The article is provided “as is" with no warranties or representations of any kind, and any liability is disclaimed that is in any way connected to reliance on or use of the information contained therein. The article is not intended to constitute and should not be considered legal or other professional advice, nor shall it serve as a substitute for obtaining such advice. If specific expert advice is required or desired, the services of an appropriate, competent professional, such as an attorney or accountant, should be sought.