Australia: Tenants insurance obligations under commercial leases

Most landlords will require their tenants to maintain insurances, and a lease will usually oblige the tenant to do so. But how often do the parties give thought to what the insurance provisions in the lease actually mean?

Types of insurances usually required

A landlord will generally require a tenant to maintain insurance policies covering:

• Public Liability. This policy covers the insured for any legal liability arising out of personal injury or property damage caused by the insured. The minimum amount of cover required will depend upon the nature and use of the premises but an amount of $20 million is not unusual in today's market.
• All plate glass replacement.
• Industrial Special Risk. This is a tailored insurance policy which generally covers an insured for physical loss, destruction or damage to tangible property belonging to the insured for which responsibility has been assumed. It also usually covers consequential loss resulting from an interruption or interference, following damage of the insured assets that have been disclosed to the insurer. Whether or not this is required will depend upon the nature of the particular transaction.

Some leases will also specifically state that a tenant is required to take out workers compensation insurance (although if the tenant is an employer, this obligation is already mandated under the Workers Compensation Act 1987 (NSW)).

Most leases require the benefit of a tenant's insurance policy to extend to the landlord. This can be done by:

• Including the landlord as a "named insured" on the tenant's policy.
• Including the landlord as an "interested party" on the tenant's policy.
• Noting the "interests" of the landlord on the tenant's policy.

Each affords the landlord with a varying degree of rights under the tenant's policy.

A "named insured" will receive and can give expiry/renewal or cancellation notices and can make a claim and enforce the policy directly against the insurer. However, the landlord will have the same obligations as the tenant under the policy (including the duty of disclosure and the requirement to pay premiums). The conduct of the tenant can also affect whether the claim is paid and in most cases the landlord and tenant will need to agree how to exercise any rights under the policy. Given the policy obligations that would be jointly shared by the landlord, it is now relatively uncommon for a landlord to require that the tenant's policies are taken out in joint names.

An "interested party" (or a third party beneficiary) is not a party to the insurance contract, and will not receive and cannot give any insurance notices. However, an "interested party" can make a claim under the policy if it is listed or named as a beneficiary in the policy ¹or referred to in the policy as someone to whom the benefit of the policy extends ². Again, the conduct of the tenant and the drafting of the insurance policy can affect whether the claim is paid.

Where a party is "noted" on an insurance policy, that party will not be entitled to make a claim under the policy (unless the policy specifically states that the insurance cover extends to noted interests). The notation simply puts the insurer on notice that someone else has an interest in the subject matter of the insurance.

The description of a landlord on a tenant's certificate of currency of insurances can often be confusing. For example, a certificate of currency may 'note' a landlord as an 'interested party'. This does not necessarily mean that the landlord will be classified as a third party beneficiary for the purposes of the Insurance Contracts Act 1984 (Cth) (IC Act). To determine the full extent of the cover and the position of the landlord, parties will need to review the actual wording of the insurance policy.

Common insurance requirements in leases

Waiver of subrogation: Subrogation enables an insurer who has paid out a claim to attempt to recover that payment from a negligent third party by suing in the name of the insured. Older leases sometimes required a tenant's insurance policy to include a waiver of subrogation clause as against the landlord. Today, such clauses are far less common for a number of reasons including the reluctance of a tenant's insurer to amend its standard policy provisions and an acceptance by most landlords to take responsibility for their own negligence. In this regard, most landlords will have their own insurance policies for the building and for public risk (and will generally collect the premiums from their tenants under a gross rental or through outgoings).

Cross liability: Cross liability relates to coverage in connection with a claim brought against an insured by another party that has insured status under the same policy. A cross liability clause in an insurance policy obliges the insurer to protect each insured as if a separate policy had been issued to each party. Where the landlord is to be a named insured under a tenant's policy, a prudent landlord may require a clause in the lease that the insurance policy is to contain a cross liability clause. However, such clauses rarely appear in leases now that tenants' insurance policies tend to be taken out in the tenant's name alone with the landlord only noted as an interested party rather than as a named insured (see above).

Notice of cancellation: Some leases require the tenant's insurance policy to state that the policy cannot be cancelled or avoided without prior notice to the landlord. However, it would be unlikely for an insurer to agree to such a clause where the landlord is merely an interested party. Accordingly, the extent of the lease obligation is really limited to the tenant being required to notify the landlord before cancelling the policy.

Increase in premiums: To protect themselves, landlords will typically maintain their own insurance policies for issues such as damage to property, personal injury, loss of rent and general public liability. Landlords will usually include provisions to the effect that, if a tenant does anything on the land which results in an increase in the landlord's insurance premiums, the landlord is entitled to recover the increase from the tenant.

If a tenant's use or occupation increases the landlord's exposure to risk, the tenant may also be liable for the landlord's additional costs associated with insuring that risk. Some examples of uses which may result in higher insurance premiums are:

• storage or use of hazardous materials
• dangerous activities
• commercial kitchens and other uses that increase the risk of fire in the premises.

Key takeaways

For landlords: In most cases, a landlord will insist on being listed as an interested party on a tenant's insurance policy. While the landlord may be entitled to some benefits under the tenant's policy, if the landlord has particular concerns regarding the risk profile of the property (or the tenant) the landlord should ensure that any specific insurance requirements in the lease are made clear to the tenant, passed on to the tenant's insurer and actually enforced against the tenant. There is little benefit to the landlord in having detailed insurance provisions in their lease, if the tenant's policy completely contradicts the landlord's requirements or the landlord is not vigilant in ensuring that the tenant actually takes out (and renews) the required insurances.

For tenants: Regardless of the insurance obligations under the lease, tenants should always assess their own situation and operations, and make appropriate disclosures to their broker/insurer, to ensure that they are adequately covered. As tenants are generally required under the lease to indemnify the landlord for any liability or loss arising from damage, injury or death as a result of the tenant's actions, a catastrophic event can have serious financial implications for a tenant if it is not adequately insured. Even if a lease has a rent abatement clause for damage and destruction or failure of services, a prudent tenant may want to arrange its own cover for consequential loss, relocation expenses and loss of market share.

Footnotes

¹ Trident General Insurance Co Ltd v McNiece Bros Pty Ltd (1988) 165 CLR 107
² Section 48 of the Insurance Contracts Act 1984 (Cth); Section 49 of the Insurance Contracts Act 1984 (Cth)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.