Co-insurance and other traps to avoid for commercial landlords

Based on claims case experience, the vast majority of commercial landlords do not have adequate property insurance coverage, according to insurance industry experts.

For commercial landlords, the most significant factors to be taken into account with regard to their risk management strategies is to ensure that they have up to date adequate insurance based on property value and types of coverage for specific risks, notes Alex Gemmiti, a senior broker at Mitch Insurance. He also strongly recommends landlords to stay on top of what their tenants are using the property for and what type and limit of insurance coverage they have in place.

According to Alicia Thompson, senior claimcare advisor, commercial property, at Gore Mutual Insurance Co., the under-insured trap most landlords fall into can be attributed to two factors: Not having undertaken a professional valuation of the property as well as not doing regular follow-up onsite inspections to determine whether tenant(s) have stuck to the lease agreement terms regarding the use of the space and any alterations/equipment brought to the premises. In some cases, the landlord has either never inspected the property or only done so every 10 to 15 years. From a risk profile perspective, a lot can change over that kind of time period, leaving landlords in the lurch in the event of a claim, she adds. Know your business and what is insured.

The typical type of loss/risk commercial landlords face based on frequency are:

With the above in mind, a critical issue is the wording and terms of the commercial lease which determines the responsibility between landlord and tenant should a loss occur. The courts are constantly dealing with litigation between landlords and tenants based on the wording of lease agreements. Notably, in Ontario, the specific wording and terms of a commercial lease agreement can supersede the legal directives outlined in the Commercial Tenants Act. As such, it is crucial for landlords to acquire professional legal advice in the structuring of a lease agreement, which will assist in identifying the appropriate level and type of insurance coverage required, says Gemmiti. It’s important for landlords to keep accurate and up to date paperwork relating to their property(s) and any changes that may have been carried out at the premises.

Thompson concurs that the evolving legal and insurance landscape applying to commercial landlords in terms of both liability and property risk requires professional assessment in establishing a risk management plan and the role of insurance coverage. Consulting an insurance broker to determine likely risk exposures is highly recommended. In identifying potential risk exposures, a broker can also develop a customized insurance program to accommodate individual needs, she adds.

Gemmiti points out that Mitch has a dedicated commercial property team which works closely with underwriters at insurance companies. Smaller commercial property risks are usually accommodated by standard coverages placed with a single insurer. However, more complex property portfolios may require tailored insurance cover which could involve the risk being spread with several insurance companies. It’s therefore important to consult a broker with regard to risk evaluation before implementing an insurance plan, he says.

Commercial landlord insurance coverage becomes particularly complicated in instances where the insured has adopted a risk management approach involving partial self-insurance – a.k.a. co-insurance – which unless the property has been insured for at least 90% of its value, then typically a policy would include a co-insurance penalty, Thompson notes.

Before any commercial landlord decides to self insure, in other words not purchase enough coverage to meet their co-insurance requirement on their policy, they should consult with their broker and understand the risks involved in doing this. This would typically mean a co-insurance penalty on any claim they were to submit even if it was far below the limit of insurance purchased. I often encounter landlords who have a co-insurance penalty on their claim because they did not purchase building insurance that reflected 90% of their building’s replacement cost and they advise me that this is the first time they are hearing the terms co-insurance or self insure. Many times they say something along the lines of ‘I would have purchased more insurance had I known…’.

Gemmiti adds, co-insurance can be a cost-effective tool from a risk management perspective, but once again I strongly advise commercial landlords to consult an insurance broker before going this route, he cautions.

Furthermore, in terms of co-insurance and whether an insurance claim should be filed after a loss, Gemmiti urges commercial landlords to confer with their broker before taking action. In some instances, the level of insurance coverage relative to the policy deductible and/or amount of self cover may not warrant filing of a claim, he explains. Commercial insureds need to take into account the amount of insurance coverage available proportional to the loss incurred whilst also taking into account the potential impact on future premium costs. Your broker can help navigate through the pros and cons, he adds.