Imagine you're sitting down to sign your first commercial lease. The landlord asks to see your certificate of liability insurance, but all you can give them is a blank stare. What are the chances you're going to get to move into that new office?
Slim to none, unfortunately. Most commercial landlords require you to carry business liability insurance so they aren't held responsible for your mistakes. Let's learn more and see which policies commercial landlords often require you to have.
Liability insurance protects your landlord from your mistakes
Henry Pharr, a member with the law firm Horack Talley and author of the firm's blog Real Estate Drill Down, says landlords have to worry about factors that are beyond their control, like their tenant's day-to-day operations. Sometimes these operations are dangerous. For an example, Pharr says imagine renting a space to someone who is making dynamite.
"If the place blows up, you want that tenant to have enough insurance to not only cover their operations and area, but also injuries to other folks and to the entire property," Pharr says.
That's one reason requiring liability insurance is a smart move for landlords. According to John Scheef, litigation attorney and co-founder of the law firm Scheef & Stone, LLP, a commercial lease divides liabilities and risks between the landlord and tenant. The landlord takes on the responsibility for repairs and maintenance while the tenant has to pay for any damage he or she causes. If coverage is not required, the landlord may have to bear the full cost of repairs.
But Pharr says your liability insurance protects your landlord in other ways.
"Let's say you have a business that involves a lot of manual labor, and you have three or four worker's comp claims in one month. By hook or by crook, your cash flow isn't going to cover that," he says. "As a landlord, you're going to be concerned that your tenant may say, 'We're going to pay these claims, and we're not going to pay the rent.'"
However, if a landlord requires the tenant to carry workers' compensation insurance, they can feel better about the business owner's ability to pay.
Requiring business liability coverage benefits your landlord, but it helps you, too. Say, for example, your employee accidentally burns down the building.
"Under the lease, the tenant is responsible for reconstructing the building," says Scheef. "Without insurance, the tenant and their assets may be executed upon to satisfy the judgement."
Liability insurance policies your landlord may require
According to Pharr, most landlords require several different kinds of policies. The first is casualty insurance, which usually means general liability insurance, but he says he's also seeing more landlords require business interruption insurance.
Landlords like clients to have business interruption insurance because it means they can sometimes still get paid even if the business owner isn't generating income. For example, he says if the city notifies the tenant of massive water and sewer system repairs that will interrupt their operations, the tenant may not have the money to pay rent. But with business interruption coverage, the tenant can make a claim to cover that cost.
Pharr has also seen more landlords asking small-business owners to carry commercial auto insurance, especially when "a tenant has any sort of transport or distribution." He says that can involve a wider range of industries than you might think, even including retail and office professions.
"Landlords will say, 'Look, you've got trucks coming in and out, and people coming in and out of the parking lot. We need to know your auto insurance is adequate,'" Pharr says.
In most scenarios, landlords ask small businesses to add them as an additional insured to their liability policies. That's usually a given, says Pharr, because small businesses don't often have the leverage to negotiate.
"Adding the landlord as an additional insured does not result in a significant increase in the cost of the insurance policy," Pharr says.