Article Reviewed by a licensed insurance professional: Sam Meenasian (CA dept of insurance license #0F75955).
Estimated reading time: 7 minutes
You’ve signed your lease and are excited about getting your business started. Before you can, however, you need to check the lease’s requirements for general liability insurance. Most landlords require it, and you’ll need it in place before you start business operations. Here’s what you need to know about a lease requiring general liability insurance.
Why Your Commercial Lease Requires You To Have General Liability Insurance
Landlords expect tenants to operate responsibly and manage risk. Because risk levels vary from one business to another, most commercial leases require tenants to carry general liability insurance.
This requirement helps shift potential liability away from the landlord. If someone is injured on the premises or alleges property damage related to your operations, both the business and the landlord may be named in a claim. A properly structured general liability policy can respond to covered claims like these, helping protect your business and, when required by the lease, extending protection to the landlord as well.
For example, if someone slipped and fell in your business and broke their hip, the injured party could sue the business and the landlord for medical expenses and other alleged damages. A commercial general liability policy may defend and indemnify a covered claim, subject to policy terms, conditions, and exclusions. The landlord is typically protected only if properly added as an additional insured. Under the standard managers or lessors endorsement, that protection is generally limited to liability arising out of the ownership, maintenance, or use of the leased premises, not every claim involving the landlord.
How Does the General Liability Policy Protect Landlords
Many leases require the landlord to be added as an additional insured. Also add that leases often require more than that, such as primary and noncontributory wording, waiver of subrogation, notice of cancellation language, and sometimes umbrella or excess limits. Being an additional insured means that your policy names the landlord on the policy through an endorsement.
The additional insured endorsement is how you add the landlord to the policy. As an endorsement, the landlord isn’t a named insured, meaning he doesn’t have a right to manage the policy. He only has protection through the policy if there is a claim made via your business naming him as the responsible party. He gets the benefit of protection up to the policy limits. Additional insured status does not increase the policy limit. Under the standard endorsement, the most available to the additional insured is generally the lesser of the amount required by contract or the policy limit.
Protecting Against Damages To Premises Rented To You
Another reason the landlord wants you to have a general liability policy is to protect the property itself. If something happens to the property, the landlord wants to make sure that the property will be fixed and restored to its original rentable status. Standard CGL is liability coverage, not first-party building coverage. For a typical long-term lease, damage to premises rented to you is mainly about the tenant’s legal liability for fire damage to the part of the premises rented by the tenant. It is not a blanket promise to restore the landlord’s building the way a property policy would.
Rebuild cost is usually a property insurance issue, and leases often have separate requirements for per occurrence limits, aggregate limits, products/completed operations, property insurance, and umbrella or excess coverage. Many leases also assume the landlord carries building coverage while the tenant carries liability and insurance for its own property.
Proving You Have General Liability Insurance
Once you have a policy in place, you will need to provide the landlord with proof of insurance. A COI is common evidence of coverage, but it is informational only. The ACORD form itself says it does not amend, extend, or alter coverage. If the lease requires additional insured status or waiver of subrogation, the landlord often also needs the actual endorsement, not just the certificate.
A certificate of insurance is available from your insurance company by request. They won’t send it automatically when you obtain insurance.
Why You Should Want a General Liability Insurance Policy
Just because the landlord requires this insurance policy doesn’t mean that it isn’t a good idea to have one in the first place. A business should want to get general liability insurance since it protects against some of the most common and costly claims that can happen. When businesses don’t have liability insurance, they are at financial risk of being responsible for the claims. This can burden the company financially, possibly leading to bankruptcy if the claim is large enough.
Think about it, a slip and fall claim might cost anywhere from $10,000 to $50,000 or more if the person was seriously injured. Most small businesses don’t have an extra $50,000 sitting around to deal with a claim. This is why you buy insurance. It’s a small manageable monthly fee to cover the high expenses of common claims.
Replacing General Liability Insurance with a Business Owners Policy
As a business owner, you want to keep costs down wherever possible. This is a given. But you also want to protect your business in case of a loss. This means that there are often two insurance policies that business owners get: the general liability policy and the commercial property policy. The commercial property policy protects your business’s assets from losses such as fire or theft.
When you get a general liability policy and a commercial property policy independently, you pay for each policy. You can reduce this cost by getting a business owner’s policy (BOP). The business owner’s policy covers both general liability and commercial property in a straightforward policy. Because the risk only needs to be underwritten once, the policy is less expensive than getting two policies separately.
By getting the business owner’s policy, you can satisfy your landlord’s requirements, protect your assets in the process, and streamline your insurance costs.
An Example of Needing Insurance
Like any business, a tattoo shop has risks associated with running the company. Like any business, someone could slip and fall, leading to injuries and claims against the company. When the tattoo shop leases its space, the landlord will require a general liability insurance policy to cover these types of losses. But these aren’t the only types of losses that a tattoo parlor can have.
For example, a tattoo and piercing parlor may do a piercing on an individual. If that individual becomes sick because of the metal used in the piercing, they could sue. Product liability may apply if the claim arises from a defective product you manufactured, sold, handled, or distributed. But if the claim is really about the piercing service, technique, sanitation, or professional negligence, professional liability may be needed because standard BOP/CGL forms often exclude professional services.
Landlords are also concerned about damage to the building itself. For example, if a pipe bursts in your tattoo shop and causes water damage to the walls or flooring, the space must be repaired quickly to restore normal operations.
This is where many business owners misunderstand their coverage. A standard commercial general liability policy is not designed to cover most damage to the premises you lease. The damage to premises rented to you provision is typically limited to fire damage in long-term lease situations.
As a result, water damage, such as from a burst pipe, is generally not covered under a general liability policy. Instead, these types of losses are usually addressed through commercial property insurance, tenant improvements and betterments coverage, or a tenant legal liability policy, depending on the lease terms and how responsibility for the space is defined.
There is a limited exception for short-term rentals of 7 days or fewer, where broader causes of loss may apply. However, this exception does not apply to most retail, office, or standard commercial lease arrangements.
While you may be satisfying a lease term at first when you obtain a general liability policy, at the end of the day, it’s a good thing for your business to have, and you’ll be glad you have the policy when a claim arises.
