Ruminations hasn’t researched commercial eviction law as it exists in every state, but wherever it has, one principle stands out. Eviction is an equitable, not a legal, remedy. Courts don’t have to evict a tenant and won’t do so for minor defaults. This approach is a subset of a legal “equitable” maxim: “Equity abhors a forfeiture.” A tenant’s “leasehold estate” is a property interest, and taking away a valuable property over a triviality is not what courts are supposed to do. Volumes have been written about this (and other) legal maxims. Not here; not today.
As to evictions, what varies from court to court, even in the same jurisdiction, is what judges consider to be “minor.” We’ll illustrate that today using “failure to maintain lease-required insurance coverages” as an example.
In 2007, in another context, we reviewed a court decision concerning a dispute as to what constituted “real” or “effective” insurance where a lease wasn’t specific as to required coverage levels. We’ll summarize the court’s view: it depends on the ability of the insured to otherwise cover losses – basically, it depends on the creditworthiness of the party required to carry the insurance. [Click HERE for that case summary.] That resonates with Ruminations because the first concept that comes into our mind when thinking about the purpose of insurance is that it is a credit enhancement product. Suppose a Fortune “10” company tenant is obligated by its lease to carry property insurance but failed to do so. Set aside questions about why it was called for or why the company agreed to do so. What difference would it make to the landlord if the tenant didn’t carry the required insurance? The tenant doesn’t need insurance proceeds to get back up and operating. Should a court evict such a tenant for failure to carry that insurance? Would a lack of such insurance be material enough to terminate a lease?
We’ve just looked at three recent New York court decisions where landlords sought to evict a tenant for failure to carry lease-required insurance. The first involved a retail lease in Manhattan (New York County – New York City). There, a tenant failed to carry a $1,000,000 “umbrella” policy. It also failed to carry workers’ compensation insurance or liability insurance related to “construction operations” and “independent contractors/subcontractors.” Nothing had happened that would have triggered a claim. The tenant wasn’t operating yet. Its contractor was adapting the space for the tenant’s use and carried insurance that would have satisfied the lease’s requirement. That insurance named the tenant as an additional insured. [Though we doubt this included workers’ compensation insurance and we don’t know if the tenant had any coverable employees at the time.] All that changed was that a new owner took over the property after the lease was signed.
On February 5, 2020, an appellate court agreed that a lower court properly evicted this tenant for failure to carry the required insurance and that a “landlord is not required to accept [a third party’s] performance in lieu of tenant’s.”
Now, we’ll jump across the river to Brooklyn (Kings County – still in New York City) for the same outcome. Here, a retail tenant was required to have a $2,000,000 liability insurance policy for any one accident and to name the landlord as an insured on the policy. It was required to provide proof of coverage to its landlord. The court didn’t report how much coverage the tenant was carrying at the time in question if any, but it appears that after the tenant received three closely-spaced letters from its landlord about the tenant’s failure to comply with the lease’s insurance requirements, it delivered an insurance certificate to the landlord. Here is how the court described the certificate:
The insurance certificate provided by the tenant to the landlord only provided coverage in the sum of $1 million, effective March 21, 2014. In addition, as the certificate stated that it was for information only, and copies of the policies of insurance were not provided, the certificate was insufficient to show that the proper insurance was actually purchased. [Underlining by Ruminations.]
The appellate court upheld the lower’s court’s eviction order and wrote:
The failure to obtain insurance was a material breach that was not cured by the purchase of prospective coverage, as such a policy would not protect the landlord against the unknown universe of claims arising during the period of insufficient insurance coverage.
The tenant offered to indemnify its landlord for consequences of any actual “shortfall” in coverage, but neither the landlord nor the court accepted this offer as adequate.
This is the same result as what we saw in Manhattan, with an additional twist. Here’s a court that rejected the only kind of insurance certificate available in the marketplace. That’s a warning for all of us who accept lease provisions calling for insurance certificates that can’t be obtained.
[To see this very short, and otherwise uninteresting, court decision, click: HERE.]
Now, jump to Manhattan three months later and to the lower court again. Here, we have different parties, but the same basic situation. A retail lease obligated the tenant to name its landlord and the landlord’s property manager as additional insureds on its liability insurance policy. Its policy named the landlord, but not the manager. This came to light after a personal injury lawsuit against the tenant included the landlord as a defendant. It did not name the manager.
The landlord asked the tenant’s insurance company for coverage. The carrier refused to provide a defense but did not disclaim the insurance coverage. To the landlord, this was the functional equivalent of not being an additional insured. It sought to evict the tenant for this reason and also because its manager had not been named as an additional insured.
The tenant asserted that it had complied with the lease’s requirement that its landlord was named as an additional insured. It argued that the coverage dispute was between the landlord and the insurance company. It also claimed that the omission of the manager was a clerical error. It quickly got the manager named, thus complying with the lease’s requirement to do so, but only going forward.
Importantly, it pointed to its obligation to indemnify the landlord and manager for claims such as were raised in the personal injury lawsuit, a defense rejected in the Brooklyn case. It also offered that it would seek to obtain “retroactive” insurance. To explain this kind of coverage, we’ll steal from the internet:
Retroactive Insurance — insurance purchased to cover a loss after it has occurred. For example, such insurance may cover incurred but not reported (IBNR) claims for companies that were once self-insured.
Backdated Liability Insurance — coverage procured for claims after a loss event has actually happened. This type of coverage is offered when the amount of the claim is very uncertain and potentially long delays in payment may result. The premium charged by the insurer, coupled with its investment value, is calculated to be sufficient to cover all the claims from the incident. This is not a commonly available type of coverage.
So, how did this court handle these facts, claims, and defenses? Did it follow its supervising appellate court’s decision from only three months earlier? Well – no. Here’s how it treated this eviction lawsuit:
A promise to secure insurance in the future to insure against prospective losses does not constitute a cure of a tenant’s breach of an insurance securement provision set forth in a commercial lease.
Where, as here, however, a plaintiff tenant agrees either to bond the defendant for losses incurred as a result of a purportedly insured claim or states that it can secure retroactive insurance to protect the landlord, a cure is possible.
This court thus declines to follow contrary authority holding that a failure to secure appropriate insurance coverage is incurable as a matter of law.
Most importantly, the court concluded that the tenant had raised:
issues of fact as to whether it had materially breached the terms of the subject lease, inasmuch as it has demonstrated that it secured an insurance policy naming the defendant as an additional insured, that the failure to name [the property manager] as an additional insured on the insurance certificate occurred through no fault of its own, and that [the property manager], as the managing agent, implicitly approved the certificate of insurance and did not direct the [tenant] to seek an amendment thereof at any time prior to being placed on notice of the commencement of the [personal injury] action. The [tenant] also raises issues of fact as to whether the absence of [the property manager] as a named insured constituted a material breach, inasmuch as no claim has been asserted against [it] in the [personal injury] action, the [tenant] has since secured a certificate naming [the property manager] as an insured, and it suggests that it may be able to secure retroactive insurance for [the property manager] for the pending [personal injury] action. Moreover, the [tenant] promises to reimburse the [landlord] and make it whole for defense costs arising from its insurer’s refusal to defend the defendant in the [personal injury] action.
[To see all this court had to say, click: HERE.]
So, what does Ruminations conclude? Most of all, we conclude that parties should strictly abide by insurance requirements. That means they need to agree to requirements that can be met. They can’t agree to carry coverages that aren’t available. They can’t be comfortable that they’re carrying functionally equivalent insurance. That’s why insurance requirements need to be vetted by competent insurance professionals, not by lease negotiators, attorneys or not. Not, by business people. Not by in-laws. We speculate, with some experience behind us, that many tenants are NOT strictly complying with their lease’s insurance requirements. And, as seen from the decisions cited above, it doesn’t take a claim to trigger a default. A change in property owner can do so.
Another takeaway is that courts don’t know what to do with insurance. Why would it be an incurable material breach if a party fails to carry insurance where no claim has been made or no claimable incident is known? Why not wait to see if a claim arises, if ever? Yes, it is a breach, but is it always a material one? Frankly, we don’t know the answer. We could argue either side, just as the courts appear to be doing.
So, why did we toss out these thoughts today? If we hadn’t made that clear, go back two paragraphs. There is a reason why some people are called experts. Pay for and follow their advice. Send the lease’s insurance requirements to them and carry the required insurance.
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