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Guidelines for insurance language for leases.

Despite the differences among the various property types available for lease today, most property managers and owners share a common desire: to reduce their exposure to uninsured loss.

With this in mind, a group of risk managers, under the auspices of the National Council of Real Estate Investment Fiduciaries (NCREIF), Tacoma, Wash., recently developed a set of insurance guidelines for managers to use when setting up lease agreements.

While NCREIF recognizes the inherent differences among different types of tenancies (e.g. retail, industrial, office, etc.), as well as the relative strengths of different landlords and tenants to negotiate favorable terms, differences in state and local laws and ordinances, and differing minimum standards for such clauses, we felt that leases overlap sufficiently to allow for some common treatment of insurance requirements.

The "Guidelines for Insurance Language for Leases" is not a be-all, end-all document; it is not intended to be any sort of panacea. Instead, we hope the document will be useful as a standard for the property/asset manager or tenant to follow. In addition, we hope that the guidelines will be a "living document" that, over time, will be changed or expanded to reflect changing industry conditions and new risk management techniques.

NCREIF's lease language guidelines are divided into seven sections, as described below.

General liability insurance

Typically, the tenant should keep in effect an Insurance Services Office (ISO)endorsed comprehensive general liability policy or an ISO-endorsed commercial general liability policy, written on an "occurrence" basis. The policy should include fire legal liability, premises medical payments, and broad form contractual liability insurance coverage.

Endorsements that might apply include:

* Deleting any employee exclusion on personal injury.

* Including employees as additional insured parties.

* Including the dram shop liability endorsement.

* Providing for coverage of the employer's automobile non-ownership liability.

* Providing a care, custody, and control endorsement

* Providing products completed operations coverage (if applicable).

* Deleting the work/product exclusion.

Coverage should apply to all bodily injury, property damage, personal injury, and other covered loss, however occasioned, occurring during the policy term. A further endorsement should add the landlord and its beneficiaries, agents, partners, officers, servants, and employees as additional insured parties. This coverage should be primary and any coverage kept by the landlord should be considered excess insurance only.

Finally, the clause should provide for severability of interests. Thus, an act or omission of one of the insured parties shall not reduce or void coverage to the other named insured parties.

Workers' compensation

Workers' compensation and employers' liability insurance should be maintained by the tenant in accordance with applicable state laws and with adequate limits per person and per occurrence. NCREIF suggests limits of no less than $1 million per person and $1 million per occurrence for these policies.

Property insurance

The tenant should maintain an "allrisk" property insurance policy excluding any coinsurance provision sufficient to cover full replacement of the tenant's inventory, tenant-installed building improvements or betterments, equipment, installations, fixtures, supplies, contents, and belongings in the premises.

The policy should have ISO endorsements specifying coverages for additional cost of contingent liability from operation of building codes, increased cost of construction, debris removal and demolition cost. The replacement cost should be specified "as of" the date of the loss.

At the very least, coverage should protect against losses from fire, water damage, and vandalism, as well as any damage to plate glass. Earthquake and flood coverage also should be maintained, if available. Suggested deductibles for these coverages are: up to $50,000 per occurrence for flood insurance, 5 percent of each loss for earthquake insurance, and $5,000 per occurrence for other perils.

Rental insurance

The tenant should maintain business interruption insurance that provides coverage for damage or destruction of the premises for at least 270 days. The insurance also should cover the loss of net income that would have been realized if the business were open, as well as such fixed charges and expenses as must necessarily continue during the suspension of business.

Boiler and machinery

If a boiler or other pressurized vessel is operated on the property by a tenant, the tenant should agree to procure boiler or other related coverage as a precondition to operating machinery. The landlord should be named as payee and minimal deductibles should apply.

Alterations and repairs

If the tenant has obtained permission from the landlord to make alterations and/or repairs to the leased space, the tenant also should maintain a builder's risk/installation floater for such work. In addition, the tenant should obtain an endorsement from his or her property insurance company granting permission for this change.

Of course, like the property coverage, this should be on an "all-risk" basis, thus including theft of materials not yet a permanent part of the building.

General provisions

Some provision should be made for the specification of damages should the tenant not secure required insurance. Damages also should include the reimbursement of the landlord for increases in the cost of insurance occasioned by the tenant's acts, omissions, use, or occupancy of the premises.

All insurance coverages should be endorsed to waive the insurer's rights of subrogation against the landlord. The tenant should provide 30 days' written notice of cancellation, expiration, non-renewal, or change in insurance coverage terms.

Finally, all of a tenant's insurance carriers should be rated no lower than "A VII" by A.M. Best's Rating Guide unless otherwise approved by the landlord.


Through these guidelines, we at NCREIF hope to offer some advice to tenants and landlords that will help to avert any potential insurance problems. However, as stated earlier, these guidelines are not meant to serve as universally appropriate lease language. In the business of real estate, each tenant/ landlord relation is unique, and a skillful risk manager must be aware of all of the elements that make it unique.

NCREIF is a non-profit association comprising real estate investment managers, pension p!ans, consultants, CPAs, academics, and appraisiers, all involved in some aspect of the ownership of real estate by pension plans. The complete text of NCREIF's Guidelines for Lease Language is available .from NCREIF, 909 '"A" Street, Tacoma, WA 98402.

Joseph B. Diehi, CPA, is executive director of the National Council of Real Estate Investment Fiduciaries. Before joining NCREIF, he was a partner and chief financial officer of TCW Realty Advisors, Los Angeles. He has 20 years of real estate experience and also has worked for JMB Realty Corporaion, Heitman Financial Services, Ltd., and KPMG Peat Marwick. Mr. Diehi graduated from Northern Illinois University, DeKalb, and John Marshall Law School, Chicago. He is a member of the American Association of Attorney-CPAs and the American Society of Association Executives.
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Title Annotation:Insurance Issues
Author:Diehl, Joseph B.
Publication:Journal of Property Management
Date:Mar 1, 1992
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