Hard as we try to “mix it up” and meter out our ramblings about insurance concepts affecting, landlords, tenants, and lenders, the insurance industry makes it pretty hard to do so. We were planning to Ruminate over purchase and expansion options this week and then Builders Risk insurance the week after that, but the ISO’s (Insurance Services Office’s) promulgation of some revised forms effective April 1 forced our hand.
Ruminations sees two changes of interest to the leasing industry and they affect: (a) additional insureds; and (b) those who serve liquor or allow its on-premises consumption. We also see some ways to change our documents to counteract the effect of some of these changes.
Additional insureds become such when covered by one of a whole bunch of possible endorsements, each one designed for a particular class of additional insureds. For example, ISO form CG 20 11 is for Managers or Lessors/Landlords of Premises and form CG 20 26 is for a Designated Person or Organization. The rights of an additional insured (and any limitations) are set forth on the selected endorsement. [Before anyone gangs up on us, some carriers use non-standard forms and include additional insured provisions in the underlying policy form itself. That’s why everyone should rely on insurance professionals to review insurance policies – it isn’t intuitive, it requires experience and training.]
Beginning April 1, three changes will take effect and each will limit coverage:
- only to the extent provided by law
- to be no broader than what the contract (e.g., the lease or mortgage) between the named insured and the additional insured requires
- to the lesser of the policy limit or what the contract (e.g., the lease or mortgage) requires
By saying that the coverage afforded to an additional insured is “only to the extent provided by law,” the new endorsement is addressing an “anti-indemnity” trend developing in state law, such as in California (by recent Statute), Texas, and Louisiana. The effect of some statutes is to limit an additional insured’s coverage to “vicarious liability,” and thus the new endorsements will not cover “shared liability.” While this mostly affects the construction industry because of the way the statutes are drafted, think about the trend and also realize that from April, 2013 on, an additional insured will get “less” not “more” from the other party’s insurance coverage.
More limiting, in the leasing – loan context, is the cap on the scope of coverage by reference to the party’s underlying agreement. For example, if a lease says that the tenant must name its landlord as an additional insured with respect to tenant’s negligence, then the additional insured’s coverage, though it could be much broader under the tenant’s policy itself, will only answer for claims based on the tenant’s negligence. In addition, there is case law in some jurisdictions that the scope of insurance is measured by the policyholding party’s lease obligations. That appears to rear its head most often with respect to “how far out in the parking lot” does additional insured coverage extend, but with the new endorsement form, this court-made limitation could be the basis for denial of coverage to an additional insured. It would seem that leases and other contracts could be re-written to require that one be named as an additional insured with coverage for every event and condition that the policy could possible cover and to say that every insurable event and condition coverable by the policy is included, by reference, as part of the insuring party’s obligation to the additional insured. Everyone will have their own formulation for such a provision, but you get the point – turn the endorsement restriction on its head.
Lastly, when the coverage cap is based on the “lesser” of the policy limits or what the contract requires, you’re going to see additional insured’s being limited to the amount of insurance they have required of the other party and no longer being protected to the full policy limit in the other party’s policy. One would think the real estate industry’s response would be to redraft agreements using the concepts that the policyholding party must name the additional insured with coverage limits equal to the full amount of each policy, but for no less than $X in coverage.
THERE IS A BOTTOM LINE HERE, one that has been said over and over by many, many who have looked at “insurance” concerns, and one that has been ignored over and over. You should update your contract (e.g., lease) forms to work around the new limitations but, if you really, really want to be covered, carry your own insurance. Fortunately or not, depending on your point of view, tenants pay for their own insurance and for their landlord’s policies as well. Lender all have adequate insurance. So, they’ve learned the lesson already.
As to locations where one can grab a drink or a bottle, the carriers are giving with one hand and taking away with the other. That’s what the insurance industry is doing when it comes to “Liquor Liability.” The new ISO coverage forms that become effective on April 1, 2013 will clearly cover claims related to BYOB, even if the insured establishment imposes a corkage fee. But, the new Liquor Liability Exclusion Endorsement, commonly made a part of a Commercial General Liability policy (not a “comprehensive general liability” or “public liability” or “general liability”), removes all such coverage. So, if you are a tenant who serves liquor or allows liquor to be brought onto your premises, watch for the new forms and talk with your broker or risk manager or consultant. Likewise, landlords and those negotiating for landlords, review your leases’ insurance provisions and make sure your administration team knows what to look for when reviewing a tenant’s insurance coverage.
Barring another intervening thought, next week, we’ll try to stir up some trouble when we discuss purchase and expansion options. Until then, keep Ruminating.