By Frank DeLucia
You value and protect your commercial real estate properties and holdings. As an owner, manager or developer, different questions likely come to mind when thinking about protecting against your risks. Is each tenant properly insured for their protection and yours? What about every contractor who sets foot on your properties? Is each maintaining the proper insurance and certifications? These are just a few that may come to mind.
Working with third parties can add a whole new level of exposures. For example, commercial tenants have a considerable amount of control over leased premises and can perform alterations to the property and if accidents occur as a result of negligence, owners or managers may be held responsible for damages. Indirect property losses can impact a real estate operation’s bottom line as well as long-term profits, especially when there’s a question of who is liable.
Thankfully, there are a few best practices you can follow to minimize these third party liability exposures:
Transferring Risk Through Lease Agreements
One way property managers can avoid risk is to include clauses relating to this type of liability in their commercial leases. A clause in the lease detailing specific responsibilities would transfer risk that named risk to the tenant. Another way to avoid being held responsible for a tenant’s negligence is to include an indemnification clause in the lease. Such a clause states that the tenant agrees to hold the property manager harmless in situations resulting from the tenant’s own negligence.
Having a single lease agreement is recommended so that all tenants know what to expect and adhere to the same set of rules, especially when it comes to insurance/indemnification/hold harmless clauses.
Require Everyone Working On Your Property Be Insured and Track it Wisely
To reduce liability, ensure every tenant procures their own business insurance and require the tenant to name you (as the landlord) as an additional insured and secure a Certificate of Insurance (COI) to this effect. Also, require that all contractors working on your property provide a COI proving that they carry adequate liability coverage and workers’ compensation insurance.
COI tracking is a vital risk-management activity. However, without an efficient process and visibility into this critical area, you may expose yourself to potential liability. Whether initial or renewal, to source and maintain COIs is a major task that could be a full-time job in itself. To help adequately manage this often cumbersome process, HUB has created an exclusive certificate management tool that has been extremely valuable for our real estate industry clients. This software helps landlords and property managers maintain all of their vendors’, tenants’ and subcontractors’ COIs, shifting the responsibility of coverage, while identifying errors or missing information that may result in a costly issue for your operation.
Develop and Maintain A Controlled Insurance Program
Another option is to procure a controlled insurance program, which ensures uniform coverage across a landlord’s real estate holdings. Under this type of insurance program, one party establishes insurance on behalf of all or most of the parties performing work on a specific site or project. Policy costs can be billed back to tenants in their common area/maintenance fees as an allocation. Be upfront and include this information in tenant lease agreements. Let them know you have a controlled program in force for the building and public liability.
When it comes to landlord and tenant liability, even with legal counsel involvement, it is common to overlook or miss the fine print in the insurance language that ties the two parties together. Contractual risk transfer is a way to share the risk so that building owners are not left paying a claim for a problem caused by one of their tenants or vendors working on the property. Your insurance advisor should be reviewing your contracts to ensure that your liability is contractually transferred to the appropriate party for damages they cause and ensure that you have the proper coverage in place.
Senior Vice President