One of the many tricky terms in the insurance provisions of a lease is the common clause requiring that the landlord be included as an "additional named insured" in the tenant's commercial general liability policy ("CGL"). While it is always a good idea to have the insurance and indemnification clauses of a lease approved by an insurance broker or a risk management advisor comfortable with the commercial leasing insurance requirements in the jurisdiction in which the leased premises are located, it never hurts to have some understanding of the insurance requirements set out in the lease. This article focuses on some of the mistaken assumptions made about the protections bestowed by the phrase "additional named insured".
By way of background, in Canada, while the CGL policy is not standardised by legislation, an industry organization, the Insurance Bureau of Canada ("IBC"), has developed a benchmark CGL policy. The use of this benchmark policy is at the discretion of each insurance company, which is why each insurer's CGL policy is unique.
A lease in a landlord's form will usually require the tenant to add the landlord to the tenant's policy as either an "additional insured" or an "additional named insured"; the distinction between these terms is an important one. Usually, the coverage provided to an additional insured under a policy is limited. For example, as in Riocan Real Estate Investment Trust v. Lombard General Insurance Co. [2008] I.L.R. I-4693 (Ont. S.C.J.). the policy might state that certain parties are added as additional insured, "but only with respect to the above noted contract and solely with respect to the operations performed by the original Named Insured." While a court could interpret this phrase broadly, as it did in this case, it still makes sense to seek the more expansive coverage provided by the phrase "additional named insured". Designating a landlord as an additional named insured extends the policy coverage to all of the landlord's operations instead of those operations performed only on behalf of the tenant. Both an additional insured and an additional named insured are entitled to a right to defend in an action and, so long as the policy contains a sole agent clause, (also called the first named insured clause in the IBC's benchmark CGL policy) the tenant is the only party responsible for paying premiums.
Difficulty can arise from assuming the broader coverage afforded by the phrase "additional named insured" automatically also provides shelter from a number of other dangers. The phrase "additional named insured" does not provide protection from: notice on cancellation or amendment of the policy; denial of recovery due to a policy breach; use of insurance proceeds; and pollution event coverage.
- The sole agent clause, mentioned above, generally provides that the tenant is the only party to whom notice must be given if the policy is cancelled or amended by the insurer. Adding an additional named insured does not impact the sole agent clause. As a result, it is prudent to ensure the lease contains the requirement that the tenant notify its insurer that the policy should not be amended or cancelled without notice to the landlord.
- CGL policies usually contain a clause denying recovery to the policy holder if the policy holder has breached any of the conditions of the policy. As an additional named insured to a tenant's policy, a landlord could be denied recovery if the tenant's actions have been found to breach the conditions of its policy. To preclude this outcome, the lease should contain a provision requiring the tenant to have the policy amended to add a clause stating that any breach by an insured will not preclude recovery under the policy by any other insured.
- In the event of damage to leasehold improvements, a landlord will likely want to ensure that a tenant use any insurance proceeds it receives to repair the damage. While a landlord may be designated as an additional named insured under a tenant's CGL policy, this does not guarantee a landlord access to or control over any funds advanced under such policy. The sole agent clause, referred to above, can also state that the tenant is the only party entitled to be named as a payee in the case of a policy payout. In order for the landlord to have a right to the insurance proceeds, the landlord must be set out as a "loss payee" on the tenant's policy. Typically, for the sake of expediency, where the landlord is a loss payee, the lease will also contain a provision stating that all proceeds relating to property other than leasehold improvements can be used by the tenant to purchase replacement property, thereby removing time-consuming landlord/tenant discussions in relation to items for which the landlord does not have a direct interest while still acknowledging the landlord's interest in the leasehold improvements. You will also want to confirm the landlord as "first" loss payee so that the tenant does not instruct its insurer to rank the landlord below its lender, which ranking could leave the landlord with empty hands in the event that the entirety of any payable proceeds is directed to the lender as first loss payee.
- CGL policies typically exclude pollution coverage unless pollution coverage is specifically set out as an exception (and is therefore covered by the policy). For example, some CGL policies have language that excepts (and thereby provides coverage for) pollution in the case of sudden and accidental events. Most importantly, though, even if pollution coverage is provided, such coverage does not generally cover a named party's damages from a pollution event. Generally when CGL policies contain a limited pollution endorsement that provides coverage for pollution events, they only pay out to third parties, not named or additional named insureds. As a result, the lease should except any limited pollution coverage from the requirement that a landlord be included as an additional named insured to the tenant's policy, so that the landlord would be considered a third party, and not excluded as a named party, by such coverage.
The above consideration of some of the risks associated with assumptions relating to the language of "additional named insured" clauses is not intended to be exhaustive. Instead, it is a reminder of how certain items, while commonly situated inside the documents we draft so frequently, still remain outside many of our comfort zones.
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.
