When it comes to your real estate operation, working with third parties can potentially add a new level of liability exposures for your business. Third-party losses can significantly impact your bottom line and longterm profits, especially when there’s a question of liability. Exposures to these losses most often trace back to inadequate contracts signed with contractors and vendors, as well as inconsistencies in tenant lease agreements. Even with legal counsel involvement, it is common to miss the fine print in the insurance language that ties two parties together.
Below are some initial best practices for minimizing third-party liability exposures. In addition to following these suggestions, your insurance advisor should be reviewing your contracts to ensure that your liability is contractually transferred to the appropriate party for damages they cause.
Require and Track Insurance
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. 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.
Once that proof is obtained, COI tracking is a vital risk-management activity; however, it comes with its own set of issues and must be properly managed and supplemented with additional measures. Even if the COI is accurate, the underlying policies could have severely limiting exclusions. Additionally, the policy that the COI certifies could be canceled tomorrow and without the insured endorsement, the certificate holder does not have to be notified of policy cancellation.
Transfer Risk Through Lease Agreements
Property managers can avoid third-party risk exposures by including clauses relating to this type of liability in their leases. A clause in the lease detailing specific responsibilities would transfer 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. This 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 there is a consistent set of rules for tenants to adhere to, especially when it comes to insurance/indemnification/ hold harmless clauses.
Develop a Controlled Insurance Program
Another suggestion would be 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.
When it comes to third party liability, contractual risk transfer is a way to share the risk so that real estate owners are not left paying 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 any damages they may cause and to ensure that you have the proper coverage in place.
Frank DeLucia
HUB International Northeast
frank.delucia@hubinternational.com
