Triple Net Leases: Sharing Liability Insurance Costs Fairly Among Tenants

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Commercial General Liability coverage protects you and the landlord from a number of different types of claims. They include:

  • physical injuries suffered by people who claim that your carelessness (or that of the landlord) caused their injury, such as a client who trips on a loose carpet in the hallway outside your office, or a customer who’s -assaulted in your store’s restroom
  • damage to the property of someone else, again allegedly the result of your or the landlord’s carelessness, such as damage your employees cause to a customer’s belongings, and
  • damages from miscellaneous misdeeds such as defamation, infliction of emotional distress, false imprisonment, and invasion of privacy, such as a client who sues you for carelessly disclosing personal information to third parties.

Liability Insurance Premium Costs

The simplest way to divide up insurance costs is to allocate them according to the size of each tenant’s space—the tenant who rents 25% of the building pays 25% of the insurance costs. This method works fine as long as the tenant mix is composed of -similar types of businesses that are more or less equal, risk-wise.

When the insurance company set the property, casualty, and liability premiums for your landlord’s building, it did so after evaluating the risks of the building as a whole. For example, if the entire structure is filled with mail order hubs, the risk of property damage and liability is relatively low, because there are no dangerous substances in use and large numbers of the public are not coming and going. Conversely, a structure with a day care and other businesses open to the public is more of a risk, since the chances of damage (such as an injury from a slip-and-fall) or a lawsuit (following a slip-and-fall) are higher. In either situation, it makes sense to share costs according to the size of each tenant’s rental, because each tenant’s operation poses a similar risk, and is thus equally responsible for the insurance rate of the building.

Now, what happens if half of a building has mail order hubs, but the other half is a fitness facility? As far as the insurance company is concerned, the fitness club has increased the risk for the building as a whole, and the premium will be set accordingly. If you happen to be an office tenant upstairs and your -=insurance bill is based on the size of your space, without regard to the riskiness of your operation, you’ll end up in effect subsidizing the club for the cost of its insurance. On the other hand, if you are the club, you’ve got it made!

Allocating Insurance Costs Fairly

If you’ve read about how to fairly share taxes (Triple Net Leases: Allocating Taxes Among Tenants) and property and casualty insurance (Triple Net Leases: Allocating Insurance Costs Among Tenants), you may recognize this problem as similar to the ones encountered there, where the building had a wide variety of tenants, and one tenant’s expensive improvements(or risky business) added taxable value or insurable risk to the property, which all tenants have to pay for in the form of property taxes and insurance premiums. The solution was to allocate taxes and property insurance according to the value of each tenant’s space. The solution for liability insurance costs similar.

If you find that the property’s insurance costs are being driven by operations more risky than yours, ask the landlord’s insurance agent or broker to assess your business separately. You may find a cooperative soul who’ll give you an idea of what the -insurance costs for the building would be without, say, the presence of the day care downstairs. With this information, you may be able to press for a reduction of your insurance bill.

The difficulty with this approach is that the landlord has already signed a lease with the day care tenant, and unless the fairness issue has already been resolved, chances are that the day care is simply paying according to its square footage, without regard to the degree of risk it presents. If the risky tenant is sitting pretty with an unfairly low insurance bill each month, locked in with a multi-year lease, the landlord can’t shift to it what she’s taking from you. Don’t expect the landlord to absorb the difference. The best you can do may be to keep this point in reserve as you negotiate the balance of the lease, pulling it out when you need the moral or fairness advantage while negotiating another point, or simply asking for less rent.

This article was excerpted from Negotiate the Best Lease for Your Business by Janet Portman

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