The importance of notifying insurance companies of lease terms

Retail and commercial leases normally include provisions setting out the tenant’s specific insurance obligations. Typically a failure to adhere to these obligations will result in a breach of the lease. Additionally, most leases require the tenant to ‘indemnify’ the landlord against certain losses or occurrences at the premises. An indemnity is an agreement by a person (for example, the tenant) to pay for losses which another person (such as the landlord) may suffer.

When entering into leases, it is imperative that tenants provide their insurer with a copy of the lease, highlighting the indemnity clause, to ensure that their insurers are on notice of the indemnity provisions. Failure to put an insurer on notice of the terms of the lease, specifically an indemnity clause, can cause issues later where the tenant seeks to make a claim under the insurance and even result in an insurer not honouring their obligations under the insurance policy.

In certain circumstances, the nature and wording of an indemnity clause may result in an increase in insurance premiums or, in certain circumstances, a refusal by the insurance company to provide the requested insurance.

In a recent transaction where we acted for an incoming tenant, the terms of the indemnity clause within a lease were such that the client was unable to obtain the insurances required under the lease. The prior tenant of the premises had previously obtained insurance without putting the insurance company on notice as to the terms of the lease and in particular the indemnity clause. As such the prior tenant was insufficiently insured and in the event that a claim was made by the tenant on its insurer, the tenant would not have been sufficiently insured thus exposing them to substantial personal liability. This could also have significantly impacted on the landlord if the tenant was not able to cover the landlord for its losses if the tenant’s insurer did not honour the policy in full. As the indemnity clause was such that no tenant was able to obtain the insurances required under the lease, the indemnity clause was renegotiated with the landlord.

It is therefore imperative that, when entering into and negotiating lease documents, tenants review and seek advice on any indemnity clause as well as provide a copy of the lease, highlighting the indemnity provisions, to their insurers.

When entering into leases, tenants should ask themselves the following questions:

• Does this lease require me to insure the liability of the landlord?
• Does my insurance policy fully comply with the insurance provisions in the lease?
• Does my insurance policy cover me for all of the indemnities in the lease?

Landlords also need to be mindful that if the indemnity clauses are too onerous, this may backfire on them.

For further information, contact our Commercial & Property Team.