Evidence of Insurance Ensures Fewer Problems

One of the most important provisions of a commercial lease—and occasionally one of the most overlooked—is the provision requiring the tenant to carry insurance. This could be liability insurance, fire insurance, or a combination, but it is a vital part of any lease agreement.

But what happens if the tenant has no fire insurance and the leased premises is destroyed by fire? Who pays and why? The answer may seem self-evident, but it may not be that simple.

In a 1986 case before the appellate court of Illinois, Lee Artoe v. Larry Cap , 489 N.E.2d 420, the tenant failed to obtain the required insurance. The building was destroyed by fire, and a dispute ensued over who was responsible for the damage.

The landlord (the plaintiff) was the owner of the two-story commercial building located at 938 to 944 West Belmont Avenue in Chicago. The ground floor contained four retail units, one of which was rented to the tenant (the defendant) for use as an ice cream store and short-order restaurant. The lease period started on April 1, 1983, and ran for one year, with monthly rent of $1,200. The significant portion of the lease agreement contained the following paragraphs:

  • Paragraph 6: "Tenant shall keep the [p]remises...and shall yield the same back to [l]andlord upon the termination of this lease, whether such termination shall occur by expiration of the term or in any other manner whatsoever, in the same condition of cleanliness, repair and sightliness as at the date of the execution hereof, loss by fire and reasonable wear and tear excepted."
  • Paragraph 12: "At the termination of this lease, by lapse of time or otherwise, [t]enant will yield up immediate possession of the [p]remises to [l]andlord, in good condition and repair, loss by fire and ordinary wear excepted, and will return the keys therefor to [l]andlord at the place of payment of rent."

The lease also contained a rider that included a paragraph that stated:

Tenant agrees to furnish and maintain at its sole cost and expense, for and during the term of this lease or any extension thereof; (1) Comprehensive bodily injury and property damage liability insurance covering all claims in any way related to the demised premises with limits of liability of not less than $500,000.00 for injury to or death of any one person and not less than $1,000,000.00 for injury to or death of more than one person in any one occurrence, and not less than $500,000.00 for property damage, such insurance to name landlord as an additional insured. (2) Workmen's compensation insurance. (3) Fire and extended coverage insurance in an amount sufficient to replace the building for which the demised premises are a part covering all losses related to or arising from activities of the tenant in the demised premises, said insurance to be payable to landlord. (4) All such other insurance relating to the premises leased hereunder and all activities conducted thereon as may be required by landlord from time to time.

It further provided that

[a]ll such insurance shall be in a form, and with companies, satisfactory to landlord, and all such policies shall provide that they may not be canceled without at least fifteen days prior written notice to the landlord. Tenant shall deliver certified copies of the policies to the landlord within ten days of the beginning of the term of this lease and renewal policies shall be obtained and certified copies thereof delivered to the landlord, at least thirty days before the expiration date of any policies hereunder. In the event tenant shall at any time fail to furnish, maintain or renew any of such insurance, or to furnish said certified copies of policies, within the time herein provided, landlord shall have the right, but shall not be obligated to provide the same, and all amounts paid by landlord in connection therewith shall constitute so much additional rent and shall be paid with the installment of rent next due hereunder.

On August 12, 1983, a fire in the store rented to the tenant damaged it and the adjacent stores, plus the second floor and roof of the building. Apparently, the landlord repeatedly had requested evidence of insurance, both verbally and by certified mail. Allegedly, several days before the fire, the tenant and its insurance agent told the landlord that an insurance policy had been placed and that evidence would be forthcoming. However, after the fire, the plaintiff discovered that the tenant had not obtained any insurance.

The tenant called attention to paragraph 6 and argued that it specifically was protected from liability for any loss by fire. However, the court ruled that the specific provision in the rider mandating that the tenant carry fire insurance was overriding.

The tenant also argued that since the landlord had reason to believe there was no insurance, the landlord had a duty to protect itself by procuring insurance, because under the lease terms, the landlord could charge this cost back to the tenant. The court did not give much weight to this argument either, finding that the landlord's conduct in repeatedly trying to confirm that insurance was in place was more than reasonable.

Finally, the tenant argued that the landlord's damages should be limited to the cost of the insurance premiums of the policy that the landlord should have procured when the tenant failed to obtain such coverage. This argument also was rejected. The court ruled that damages for the breach of a contract are not limited to just the immediate costs of compliance. The measure of damages for breach of contract normally is the damages reasonably foreseen from the breach. Since the fire loss reasonably could have been foreseen, they properly were part of the damages for which the tenant would be liable.

Perhaps the most prudent thing that a landlord could do to prevent such problems is to require that a tenant provide evidence of satisfactory insurance coverage prior to taking occupancy. This requirement would remain in place even though the parties may have agreed that the tenant may take occupancy without payment of rent (an arrangement that is not at all unusual at the beginning of a tenancy, giving the tenant some time to fit up the premises).

With the insurance in place, along with a standard provision that the landlord is named as an additional insured, the landlord will be notified before the insurance policy lapses or is canceled. This will allow this critical element of any lease agreement always to be in effect.

Hanon W. Russell, CCIM, JD

Hanon W. Russell, CCIM, JD, is a partner in the firm of Cantor, Floman, Russell, Gross, Kelly, & Amendola, P.C., located in Orange, Connecticut. Russell can be reached by phone at (203) 795-1211 or by e-mail at hwr@chesscafe.com. The discussion of legal issues involved in this column is for informational purposes only. Results may vary depending on state laws and particular facts.