Your commercial lease probably spells out exactly what insurance to carry, and the seller may not have carried all of it. Many leases require liability at set limits with the landlord as an additional insured, property coverage for your build-out and contents, and often plate glass, business income and a waiver of subrogation. When the lease is assigned to you or continues after closing, those requirements become yours, and landlords often use their consent to update them. This guide is for new owners who inherited a lease and want to know what its insurance clause actually demands.
The short answer
- Find the insurance, indemnity, casualty and waiver clauses in the lease, plus any exhibit or rules the lease pulls in by reference.
- Typical demands: liability limits, the landlord and its lender and property manager as additional insureds, property coverage for tenant improvements, plate glass, business income and a waiver of subrogation.
- In an asset deal, many leases require the landlord's consent to assign; in a stock deal, a change of control clause may require it. Either can come with new insurance conditions.
- Check the policies themselves, not the seller's certificates, against each requirement.
- Your deal counsel should confirm what the assignment or consent changes legally.
What does a typical commercial lease require you to insure?
Lease insurance clauses vary a lot by landlord, property type and how much negotiating power the tenant had. Retail, office, industrial and single-tenant net leases (where the tenant pays building costs) all look different. This table shows the clauses you will most often find and what to check on the policies you inherited.
| Lease clause | What it usually asks for | What to check on your policies |
|---|---|---|
| Commercial general liability | Set limits per occurrence and in aggregate | Declarations page limits, and whether an umbrella may count toward the total |
| Additional insured | Landlord, and often its lender and property manager, added to your liability policy | An endorsement that covers each named party, not just a box on a certificate |
| Primary and noncontributory | Your liability policy pays before the landlord's own insurance and does not ask it to share | An endorsement with that wording for the landlord and each other named party |
| Umbrella or excess | Extra liability limits above the primary policy | Umbrella limit, and whether it extends to the additional insureds |
| Property for tenant improvements and contents | Coverage for build-out, fixtures, equipment and inventory, often at replacement cost | Limits for improvements and business personal property, and the valuation basis |
| Plate glass | Tenant pays to repair or insure storefront glass | Whether glass is covered, any sublimit, and the deductible |
| Business income or rent | Coverage so you can keep paying rent after a covered loss | A business income limit and period long enough to cover rent during repairs |
| Waiver of subrogation | Each side's insurer gives up recovery against the other, often mutually | Whether your property and liability policies allow or grant the waiver |
| Workers' compensation and auto | Statutory workers' compensation, sometimes auto liability if you use the lot | Policies in force in your entity's name |
| Notice and carrier quality | Notice before cancellation and a minimum carrier financial rating | What the carrier will actually provide, and your carrier's rating |
| Indemnity | You hold the landlord harmless for certain claims | How far your liability policy covers liability assumed in the lease |
For the certificate side of this, see certificates for a landlord and what insurance you need to rent commercial space.
What changes when the lease is assigned at closing?
How the lease reaches you depends on the deal structure, and the details are a legal question for your deal counsel.
- Asset purchase. The seller's company is the tenant, so the lease usually has to be assigned to your new entity, and many commercial leases require the landlord's consent. Landlords often attach conditions: updated certificates naming your entity, higher limits under their current template, a security deposit, or a personal guaranty from the new owner. Your new entity's policies generally need to be bound and in force, and to meet the lease, by the assignment date; a quote or an application does not count.
- Stock purchase. The tenant entity does not change, so a plain anti-assignment clause is usually not triggered, but many leases treat a change of control as an assignment that needs consent. The lease's insurance terms continue to apply, and the landlord may ask for proof that nothing lapsed.
- New lease. Sometimes the buyer signs a new lease instead. Read its insurance clause as if for the first time, because new templates often carry higher requirements than the seller's old lease.
Also check whether the seller remains liable under the old lease after assignment; that is a negotiation point between the parties and the landlord. If the seller owns the building and leases it to the business, the issues are different; see when the lease or building stays in the seller's name.
Who insures the building, the improvements and the glass?
The lease decides, so read it before assuming. In many multi-tenant leases, the landlord insures the building structure and passes the cost through as part of rent or operating expenses, while the tenant insures its own improvements, fixtures, equipment and inventory. In many single-tenant net leases, the tenant pays for, and sometimes buys, the building insurance too.
Tenant improvements (the build-out paid for by a tenant, such as walls, flooring, lighting and counters) are a common gap. Some leases make the tenant responsible for insuring and rebuilding them even though they become the landlord's property at lease end. Commercial property policies can cover a tenant's improvements, but the limit has to reflect the cost to replace them today, not what the seller spent years ago. Under the standard property form, property is valued at actual cash value (often figured as replacement cost minus depreciation, though the method varies by state) unless replacement cost is shown on the declarations. Tenant improvements also have their own valuation rule: if you do not repair them, payment can be based on a share of the original cost tied to the remaining lease term, so check that too. The purchase price allocation in your deal is not an insurable value. See the commercial property review.
Plate glass clauses are common in retail and restaurant leases. Storefront glass is usually part of the landlord's building, so a tenant policy that insures only your contents and improvements may not cover it even when the lease makes you responsible. Many carriers offer a building glass endorsement for tenants, or you can buy separate glass coverage. Ask your broker which applies, and what limits and deductibles apply, before a broken storefront answers the question.
Can the landlord's insurer come after me if a fire starts in my space?
Subrogation is an insurer's right, after paying your claim, to sue whoever caused the loss. Many leases contain a mutual waiver: each side agrees its insurer will not pursue the other. If a fire starts in your space and damages the building, the landlord's property insurer pays the landlord and, under the waiver, generally does not come after you.
The waiver only works as intended if your policies allow it. Many property policies permit you to waive recovery rights in writing before a loss, and landlords usually require a liability endorsement that grants or confirms a waiver of subrogation to a specific party or to anyone you agreed to in a written contract. Waivers made after a loss can create problems with your own coverage. Ask your broker to confirm, in writing, that each waiver in the lease is supported by your policies. See waiver of subrogation on a certificate.
If the lease has no waiver, or the waiver does not reach a loss, check the damage to premises rented to you limit on your general liability declarations. Under the standard form, that limit is the main liability coverage for fire damage you cause to the space you lease, and it is often far below the building's value. Damage from other causes to premises you rent long term is generally excluded. Ask your broker whether that limit fits the lease, or whether separate tenant's legal liability coverage makes sense.
Does the lease require business income or rent coverage?
After a fire or storm, rent may keep coming due unless the lease has an abatement clause that pauses it while the space is unusable. Many leases require the tenant to carry business income coverage so it can keep paying rent and other ongoing expenses during repairs. Some landlords require a set number of months.
Business income coverage under the standard form responds when operations are suspended because of direct physical loss or damage to property from a covered cause, with a few narrow extensions. It does not pay because a key customer leaves or the seller walks away. Check the limit, the waiting period and how long the policy will pay against your rent and fixed costs; see the business income review.
What does a lease gap look like at closing?
A hypothetical example. A buyer acquires a specialty food retailer in an asset deal. The ten-year lease requires $1,000,000 per occurrence and $2,000,000 aggregate general liability and a $3,000,000 umbrella. It also requires the landlord, its lender and its property manager as additional insureds on a primary and noncontributory basis, replacement cost coverage for $400,000 of tenant improvements, plate glass, 12 months of business income and a mutual waiver of subrogation. The seller carried a $1,000,000 umbrella, named only the landlord, insured the improvements at the original build-out cost of $150,000 on an actual cash value basis, and had six months of business income.
The landlord's consent letter makes the assignment conditional on proof of compliance at closing. The buyer's broker places the new entity's policies with a $3,000,000 umbrella. The additional insured endorsements cover the landlord, lender and property manager, with primary and noncontributory wording; the broker confirms this in the wording, since some blanket forms reach only parties you do work for. The improvements limit is updated to replacement cost. The program also includes a building glass endorsement for the storefront, business income sized to pay 12 months of rent and fixed costs, and blanket waiver wording. Everything is bound before the closing date. The certificate goes to the landlord with copies of the endorsements. The numbers are illustrative only.
How do I review my lease's insurance clause in an afternoon?
- Get the full lease, every amendment, the assignment or consent document and any rules or exhibits the lease refers to.
- Search for the words insurance, indemnify, casualty, subrogation, glass, alterations and assignment.
- Copy each insurance requirement into a simple list: coverage, limit, who must be named, and any special wording.
- Ask your broker for the declarations pages and endorsement schedules for general liability, umbrella, property and business income.
- Mark each requirement met, partly met or not met.
- Fix gaps by endorsement or new limits, or ask the landlord in writing to accept a change.
- Send the landlord a new certificate only after the policies are fixed, and calendar the renewal date so updated certificates go out on time.
The same method works for customer contracts; see how to check your customer contracts against your policies. If you would like help, Morrow can compare your lease's insurance clause with your policies, list the gaps and request quotes or endorsements; carriers decide what they will offer.
Keep reading
- When the Lease or Building Stays in the Seller's Name: Who Insures What
- How to Check Your Customer Contracts Against Your Policies
- New Owner Review: Commercial Property
- When Customer Contracts Require Coverage You Do Not Have
- Certificates the Seller Issued That Your Policy Does Not Back Up
- All guides for new business owners
Frequently asked questions
Does my landlord need to approve the lease transfer when I buy a business?
In an asset purchase, many commercial leases require the landlord's consent to assign the lease to your new entity. In a stock purchase, a change of control clause may require consent. Your deal counsel should read the lease and confirm what is needed.
Can my landlord raise the insurance requirements when I take over the lease?
Landlords often attach conditions to their consent, and updated insurance requirements are a common one. Whether they can insist depends on the lease wording and the negotiation, so raise it early with the landlord and your attorney.
Who insures the improvements in a leased space?
The lease decides. Many leases make the tenant insure its own improvements and contents while the landlord insures the building, but net leases can shift more to the tenant. Check the lease and set the limit at today's replacement cost.
Is it enough to list my landlord as the certificate holder?
Usually not. A certificate holder only receives proof of insurance. An additional insured is added to your policy by endorsement and can claim under it within that endorsement's terms. Many leases require additional insured status for the landlord, and often its lender and property manager, so check yours.
Will my business income insurance pay my rent after a fire?
It may, if the fire is a covered cause of loss that physically damages the property and suspends operations. Check that the limit and the period of coverage are long enough for your rent and other fixed costs.
References
- Insurance Services Office: Building and Personal Property Coverage Form CP 00 10 04 02 (carrier-hosted copy)
- Insurance Services Office: Business Income (and Extra Expense) Coverage Form CP 00 30 10 12 (hosted copy)
- IRMI: Waiver of subrogation (definition)
- IRMI: Additional insured (definition)
Just bought a business? Get your insurance reviewed.
Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.
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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.