Real Estate Law

Tenants Allowed to Maintain Almost "No Deductible" For Commercial Insurance Coverage

When was the last time you reviewed the insurance provision of your tenant’s commercial lease?  Do you know if the lease prohibits a high deductible for the tenant?

It is probably a good time to take a look at the lease in light of the New Jersey Appellate Division’s decision on August 20, 2007 in Boston Market Corporation f/k/a Golden Restaurant Operations, Inc.  v. Myrus Hack, docket No. A-0182-05T20182-05T2 27-2-8272 (unpublished). The Appellate Court held that a commercial tenant was not in default under a lease because it’s maintained insurance with an extremely high deductible.

The Appellate Court characterized this issue as: “The simple question posed here is whether or not the insurance arrangements made by [plaintiff] comply with the lease provisions respecting the tenant’s insurance obligation.”  The lease did not expressly prohibit insurance with a high deductible.

The Appellate Court focused on whether the insurance obtained by plaintiff, with high deductibles of up to one million dollars, constituted self-insurance or no insurance at all. The tenant always maintained insurance coverage for the property.

The Appellate Court concluded that the tenant was not in default of provisions relating to insurance requirements in the lease between the parties.

Although the Appellate Court may have placed form over substance in its lease interpretation, the decision highlights the value for commercial landlords to review and understand their lease language regarding their tenant’s responsibility to obtain insurance. Specifically, commercial landlords should review their leases for the following points:

1) Type of Insurance.  Ensure that the lease describes the particular type of insurance to be maintained;

2) Maximum Deductible.  Provide a provision within the lease for a maximum deductible.  This can help eliminate a tenant obtaining insurance with a higher deductible than any potential loss that could be sustained if the property were destroyed.  For instance, if the property is worth $1 million dollars, but the deductible is $1 million dollars, the tenant is the one responsible for the $1 million dollar loss.  A tenant’s bankruptcy could wipe out their liability;

3) “First Dollar Coverage.”  Check that the lease contains a statement that the insurance policy must furnish “first dollar coverage.”  This allows the insurance carrier to pay the claim on a first dollar basis, then require the tenant reimburse the carrier up to their deductible amount.
 

From Real Estate - New Jersey Law Blog posted 2007-09-07.