Building Better Leases Series – Property Insurance: Building and Improvements, Rental Value, & Adjacent Premises

Building Better Leases

Building and Improvements

The Lessor is required to get flood and/or earthquake coverage if the Lender requires it. These policies, however, do not cover the Lessee’s property. The policies should contain an agreed valuation provision, waiver of subrogation and inflation protection that uses the CPI as its index. In addition, the deductible should not exceed $1,000.00.

According to the Lease, the policy is required to contain an agreed valuation provision. The difference between an agreed valuation provision and coinsurance policy is the way in which the amount of required insurance is determined. This means the portion of the claim that is paid by the insurance company is different based on the type of policy.

Before agreeing to a policy, the lessor should verify that any insurance covering the Premises, Building and/or Project is sufficient and takes into account the current cost of construction in order to perform repairs or replace the Premises, Building or Project. Earthquake insurance is not required but should be taken into account based on location.  The Lessee should be aware that earthquake insurance can double the cost of the insurance required by the Lease. In addition, Lessors should verify that the deductible amounts required under the Lease match those offered in its policies; their insurance should also be based on agree valuation rather than coinsurance.

Rental value

The Rent paid by the Lessee is abated if the property is damaged or destroyed. The Lessor is provided with the income equal to the lost Rent through Rental Value Insurance.

Adjacent premises

The Lessee is liable for any increase in insurance premiums caused by its acts, omissions and/or occupancy of the Premises. These obligations are in addition to its other obligations to pay its share of insurance premiums under the Lease. Some tenant’s use may increase the risk on a landlord’s insurance premiums, so tenants can contact the landlord’s insurance agent with questions about their use and higher premiums.