Who Should Insure What in a Commercial Lease? A Legal Perspective for the Public on Insurance Obligations
- Ignas Bartus
- Dec 14, 2024
- 5 min read
Insurance is a critical part of any commercial lease in England and Wales. Whether you’re a landlord or a tenant, ensuring the right insurance is in place is essential for protecting yourself, your property, and others from potential risks. Misunderstanding these responsibilities can lead to costly disputes, uninsured losses, and unexpected liabilities. This article breaks down insurance obligations, grounded in statute and case law, to provide clarity.
The Basics: Who Insures What?
Buildings Insurance
When it comes to the physical structure of the property, the insurance obligations typically fall on the landlord. Buildings insurance covers risks like fire, flooding, and structural damage. Your commercial lease will include a more detailed list of risks to be covered by the landlord, although the risks to be covered will often be left to the landlord's own discrtion. Why is this?
Why is this the Landlord’s Responsibility?
Ownership Interest: The insurance obligations for insuring the building often arises from the landlord’s reversionary interest in the property. Case law such as Goose v. Wilson Sandford & Co. [1998] 1 EGLR 153 establishes that landlords have a legitimate interest in ensuring the protection of their property i.e. the landlord has the most at stake in protecting the property’s value.
Centralised Responsibility: Avoids overlaps or gaps in coverage and simplifies administration.
Cost Recovery: Section 19(2) of the Landlord and Tenant Act 1985 enables landlords to recover the cost of buildings insurance premiums through service charges, provided the charges are reasonable and transparent, in accordance with the Service Charges (Consultation Requirements) (England) Regulations 2003.
Risks of Tenant-Arranged Insurance
Tenants might underinsure or fail to account for certain risks, as seen in Sun Alliance & London Insurance Ltd v. Thistlewood [1994] C.L.C. 133. This case involved a tenant who failed to adequately insure a building for its full reinstatement value, despite being required to do so under the lease. When a fire caused significant damage, the insurance coverage was insufficient to meet the reinstatement costs, leaving the landlord with a financial shortfall and the court held that the tenant had breached their contractual insurance obligations and therefore the tenant was ordered to compensate the landlord for the financial shortfall caused by the insufficient insurance coverage.
A tenant’s policy might not meet the landlord’s specific requirements, leading to disputes over claims. The lack of adequate coverage often triggers disputes under lease clauses mandating “comprehensive insurance,” which courts interpret strictly. Misalignment of policy terms with lease obligations can constitute a breach, as outlined in cases like Mark Rowlands Ltd v. Berni Inns Ltd [1986] 1 QB 211.
Insurance Obligations concerning Public Liability
Public liability insurance protects against claims from third parties who are injured or suffer damage while on the property. Public liability insurance obligations are typically divided based on who controls the relevant areas. This division is crucial to avoid gaps or conflicts in coverage.
For Access Roads and Common Areas:
The ordinary position in commercial leases is as follows:
Landlord: Insures shared spaces such as communal areas and access roads.
Tenant: Responsible for areas exclusively leased and controlled.
Legal Context and Key Cases:
Cavalier v. Pope [1906] AC 428 establishes that a landlord does not owe a duty to third parties injured on premises exclusively occupied and controlled by a tenant. Therefore if a landlord insures for liabilities arising in areas under a tenant's exclusive control, the landlord’s insurer may argue that the liability lies with the tenant, not the landlord. This can create gaps or conflicts in coverage when claims are made, as insurers may refuse to indemnify the landlord for such claims.
Lister v. Romford Ice & Cold Storage Co Ltd [1957] AC 555 deals with conflicts between insured parties and insurers, particularly around rights of recovery. If the landlord’s insurer pays out for a public liability claim in a tenant-controlled area, they might seek indemnity or contribution from the tenant’s insurer, leading to legal disputes and potential double exposure.
The Occupiers' Liability Act 1957 makes it clear that the party in "control" of an area owes a duty of care to lawful visitors. Liability follows control rather than ownership. Thus a claim arising from an incident in a tenant-controlled area would generally fall on the tenant, not the landlord. A landlord holding public liability insurance over such an area could result in a denial of coverage or subrogation claims against the tenant.
The Dangers of Double Insurance:
Double insurance occurs when both the landlord and tenant insure the same area or liability. While this might appear to provide extra protection, it can create significant complications.
Under the principle of contribution (as established in North British and Mercantile Insurance Co v. London, Liverpool and Globe Insurance Co [1877] 5 Ch D 569), insurers may dispute their respective liabilities, leading to delays in claim resolution.
If one insurer pays the claim, they might seek subrogation against the other insurer or insured party, as seen in Lister v. Romford Ice & Cold Storage Co Ltd [1957] AC 555, potentially exposing tenants or landlords to further liability. Furthermore, overlapping insurance can lead insurers to void policies if they deem the coverage unnecessary or if disclosure obligations are not fully met.
The last issue with double insurance is that both parties end up paying premiums for redundant coverage, which could have been avoided with clear allocation in the lease.
To prevent the dangers of double insurance, leases should clearly allocate insurance obligations. Both landlords and tenants should:
Regularly review their policies to avoid overlaps.
Disclose all insurance arrangements to the other party.
Seek legal advice to ensure compliance with the lease and relevant laws.
Other insurance policies to think about:
Contents Insurance
Contents insurance is invariably the tenant’s responsibility, covering items such as office equipment, stock, or other business-related possessions.Tanner v. Duke [1935] 1 KB 34, highlights that landlords are not liable for tenants’ chattels unless explicitly agreed.
Employer’s Liability Insurance
If a tenant employs staff, they are legally required under the Employers' Liability (Compulsory Insurance) Act 1969 to have employer’s liability insurance. This protects against claims from employees injured or made ill due to their work.
Business Interruption Insurance
Business interruption insurance compensates tenants for loss of income during disruptions such as a fire or flood, or by way of a more recent example, the COVID 19 pandemic. There are no statutory requirements for this insurance and it is therefore arranged on the tenant's own incentive.
Why Getting it Right is Crucial
Potential Consequences:
Uninsured Risks: Essential liabilities or areas may go uncovered.
Legal Disputes: Ambiguities can lead to costly disagreements, as in Arnold v. Britton [2015] UKSC 36, which highlighted the importance of clear contractual terms.
Policy Voids: Misallocation can result in claims being denied.
Double Insurance: Overlapping policies waste money and complicate claims.
The Role of the Lease:
A well-drafted lease, compliant with the Landlord and Tenant (Covenants) Act 1995, minimizes disputes by clearly defining insurance obligations.
Final Thoughts on Insurance Obligations
As a landlord or tenant in England and Wales, ensuring precise and accurate insurance obligations in a commercial lease is essential. Generally, landlords insure the building and shared areas, while tenants cover their business operations and contents. Statutes like the Landlord and Tenant Act 1985 and case law including Goose v. Wilson Sandford & Co. guide these allocations. Always seek legal advice to review your lease and insurance arrangements to avoid costly errors.
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