By Attorney Janet Portman
Property and casualty insurance covers the building for fire, smoke damage, explosions, and other disasters or "perils." The policy won't cover perils that it specifically excludes, such as damage from floods. If a peril isn't listed as an exclusion, the insurance policy will generally cover it.
As with other lease clauses, how you and the landlord allocate the cost of insurance depends on your negotiating power and expertise. Hammering out who pays the premiums is no different from negotiating who will pay for improvements.
Don't get sidetracked by thoughts that since the landlord owns the building, the landlord ought to pay to insure it. Instead, recognize that adequately insuring the building will benefit both of you. Now, decide whether you'll use your bargaining power to attempt to modify the extent of your share of the cost or, instead, agree to pay what the landlord has assigned to you and save your bargaining might for another lease clause.
Damage from floods, earthquakes, pollution, and civil riots are often excluded from property and casualty insurance policies. Sometimes, you can purchase separate policies to cover these exclusions—earthquake insurance, for example, is available in -areas with known seismic activity. The federal government offers flood insurance for some properties on a flood plain. Environmental contamination policies, covering claims arising from asbestos, lead paint, and indoor air problems are increasingly available.
Before heading into negotiations, be sure you understand other important aspects of this type of insurance.
Property and casualty insurance will protect the building—roof, interior and exterior walls, stairwells, and parking structures. But what about the items inside the building? Although "contents" are part of the policy name, the policy will by no means cover damage or destruction to everything inside.
Covered. The landlord's own business property, such as maintenance equipment, office supplies, and furnishings, are "contents" covered by the landlord's policy. You'll need to purchase separate insurance to cover your own business property. Improvements to the property that were added to customize the space for your needs will normally be covered because, unless you and the owner have decided otherwise, improvements are by law the landlord's property.
Not covered. In addition to specific exclusions (such as damage from earthquake), damage or destruction to the building's vital systems—heating, ventilation, and so on—are not included in property and -casualty insurance. You or the landlord must purchase separate policies for them. Your own business property—your trade fixtures, inventory, and other personal property—are also not covered by this policy. Your landlord may insist, in the lease, that you insure these items.
Sometimes landlords and tenants agree that an improvement will not become the landlord's property. For example, if you want to be able to take the improvement with you when you leave, such as an expensive server for your computer network, you will bargain for the right to remove it. In this event, the improvement is not covered under the property and casualty policy. Instead, you'll have to insure it as you would a trade fixture.
Finally, many monetary consequences of a fire or other casualty are not included within this coverage. For example, if the building is damaged or destroyed, your lost profits and the landlord's lost rents won't be compensated by the property and casualty policy. If you want coverage for these losses, you'll have to request an endorsement from your broker, which adds this coverage to the policy. Or, you may need separate policies for this coverage.
This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman