Q: An insured is responsible for insuring a building under the terms of their triple net lease with the building owner. What is the best way to structure the building owner's interest on our insured's policy?

Should they be listed as an additional named insured, additional insured, or something else? As far as the real property is concerned, should they be a loss payee?

Response 1: Your insured and their lawyer need to review the lease to determine exactly what's required. This is lawyer work, not a do-it-yourself project for an insurance agent. Any of the options you cited are fine as long as they meet the lease requirement. 

Also, it's important to include a mutual waiver of subrogation in the lease. If that's not possible, you'll need to consider all possible avenues for a lawsuit by the landlord's insurance company for damage to real or personal property or for indirect loss.

Response 2: The lease should specify the lessee's requirements for the insurance. Only structure the building owner's interests as required by the contract. Unless there is a contractual requirement to provide insurance to them, there is no need for the insured to provide coverage. Most likely, the lease is requiring an additional insured and loss payee status.

Response 3: CP 12 19—Additional Insured Building Owner is one of two options for addressing the interest of a building owner when the named insured is a tenant who is required to insure the leased building. This endorsement states that the building owner identified in the endorsement schedule is a named insured with respect only to the coverage provided for direct physical loss or damage to the building designated in the endorsement schedule. 

CP 12 18—Building Owner Loss Payable Clause in the loss payable provisions establishes that loss to the building will be adjusted with the building owner shown in the endorsement schedule. It also establishes that loss to improvements and betterments will be adjusted with the named insured tenant, unless the lease stipulates otherwise.

Under CP 12 19, covered loss to the identified building would be adjusted with and payable to both the insured and the building owner, since both are named insureds with respect to the identified building. However, under CP 12 18, covered loss to the identified building would be adjusted with and payable to the building owner only, except that loss to tenants' improvements and betterments is adjusted with the insured tenant.

Also, notice of cancellation is not granted to the building owner under either approach. 

Response 4: First, carefully read the lease in its entirety. The insurance requirements section of the lease won't address many of the insurance obligations assumed by the tenant. The damage and destruction, maintenance or repair sections, or similar sections by other names, may spell out insurance issues not found in the insurance requirements section.

Obligations for the tenant to assure the owner that any contractor, subcontractor or sub-subcontractor has insurance coverage is usually found separately. This is a big deal. Identify and address requirements in the lease to address the interest of any of the lessor's mortgage holders.

Lease language often speaks to "full insurable value," "fully insured," "replacement cost" and other terms. The tenant needs to have an annual agreement with the lessor regarding what that sum will be.

Triple net leases often involve large facilities where the repair or rebuild may take two or three years. Make sure the tenant's business income and extra expense limits are in sync with those contractual obligations, which can be complicated if the lease renewal is approaching.

If the triple net lease is with a public body financed through a bond issue, obtain the bond document and carefully read the obligations for insurance, damage, repair, reconstruction and more.

Is your insured's property program blanket or specific? If blanket, let me suggest you clearly disclose the lease arrangement with your carrier. Many triple net lessors want a specific policy as they don't want a 200-page blanket property program policy. If so, carefully think through a total loss on the leased building. Insure for 100% as agreed with the lessor. Then, look at the cost to remove debris and leave the site clean and cleared as spelled out in the lease agreement.

Further, look at the lease terms to see if the lessor is to be a named insured or an additional insured. It may be prudent to obtain a lessors risk policy in the name of the lessor to keep any claim for liability of the lessor out of your insured's casualty program. Then, separately name the lessor as additional insured or as required.

You're wading in deep water. Be careful.

Response 5: The best solution is for the owner to buy and control the insurance and make the cost part of the lease price to the tenant. Triple net leases are full of insurance time bombs waiting to go off. I never understood why a building owner would trust a tenant to buy insurance on the building. It's like me letting someone else insure my house or car.

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.

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