The Insurance Clause in Tenancy Agreements Explained

What is an insurance clause in a tenancy agreement?

An insurance clause in a tenancy agreement is a provision that requires tenants to take out a specific type of insurance policy. This type of clause is common in commercial tenancies, the most common variation being contents insurance, which requires the tenant to take out a policy against loss or damage to the property’s contents (unless the tenant can provide a written exception covering that particular item of contents).
Depending on the tenancy, the insurance clause may require more than just contents insurance; for example, the tenancy may stipulate that the tenant takes out a liability insurance policy, which is separately assessed by insurers on the basis of the tenancy and provides coverage up to a specified limit.
Whilst this type of insurance clause is commonly found in commercial tenancies, it occasionally features in residential tenancies (particularly in high-rise buildings). Although the wording of the tenancy agreement may include the word "insurance" , the majority of these agreements are tailored to provide the insurer with no more than indemnity for damage caused to the building, its contents and common areas.
The tenancy clause may contain a face value limit for contents insurance, to which a small policy excess applies. This means that the insurer will indemnify the tenant for the reasonable costs of replacing contents (up to the limit stipulated in the tenancy agreement) in the event of an insurable event. In assessing the insurance clause, insurers must consider the People of Sova decision and the precedents that have followed. This case confirmed that insurance clauses contained in tenancy agreements form part of a commercial contract, to which the Common Law principles of construction apply. Any construction should start with the words of the clause, read in the context of the policy and its other endorsements.

Different kinds of insurance covered

Before agreeing to a tenancy agreement, whether residential or commercial, parties will want to confirm what insurances are expressly required or covered by the specific clause in any agreement. In addition to landlord’s buildings’ insurance and tenant’s contents insurance, it is also possible that other types of insurance may be covered under an insurance clause in a tenancy agreement. For example, the following insurances may be covered by the insurance clause in the tenancy agreement:
Landlord’s Buildings Insurance: Landlord’s building insurance is typically required in a tenancy agreement, insurers should be notified of any alterations made to the property so that this insurance will remain valid.
Tenant’s Contents Insurance: Contents insurance should normally be organised by the tenant to cover the tenant’s contents, in particular to cover expensive items such as televisions, audio-visual equipment, furniture, jewellery, ornaments, clothing, art work and valuable personal property.
Public Liability Insurance: This is designed to cover any claims made by the general public for sympathy reasons for personal injury or damage sustained on the insured property, whether it is caused by the negligence. A landlord may require this type of insurance from their tenant, however, it can also be required by the landlord himself.
Employer’s Liability Insurance: Employer’s liability insurance only becomes relevant for commercial tenancies in which the landlord employs staff, usually a commercial landlord will want the tenants and himself to have employer’s liability insurance if he/she employs staff.
Building Contract Insurance: This insurance covers damage to the property as a result of building works affecting the property, such as fire, water or theft.
Communal Facilities Insurance: This type of insurance covers shared facilities, which may be anything in the communal areas of the property.
Other types of insurance may also be provided for depending on the tenant’s activities. It is therefore advisable that parties consider carefully the insurance clause they wish to include in the tenancy agreement.

Advantages to landlords and tenants

One of the main benefits to landlords of the insurance clause is that it reduces the burden of maintenance of the building. Since any common parts will be owned by the landlord, who is responsible for insuring them, this frees the tenants from having to arrange separate insurance for the common areas with the extra cost and inconvenience that would be involved. Likewise, the landlord will be in a position to choose the insurance company and the premium, potentially saving the costs of arranging separate insurance by group purchasing.
Beyond merely alleviating a burden, the insurance clause offers both the landlord and the tenant significant protection. If the minimum standard is set at a substantial level (e.g. effective full replacement cover), then the tenant can be assured that, even if some unforeseeable event causes damage to the structure or content of the property, there will be funds available when it comes to rebuilding or replacing and the disruption will therefore be minimal.
In situations where the property is destroyed or uninsurable, a common problem can arise; the landlord wants to repair the property and tired of having to spend money on a building he knows he is never going to occupy again, while the tenant wants to get out of the tenancy as quickly as possible and make a new life elsewhere. Given the extended lengths of some commercial leases, it is not uncommon for a catastrophe to occur which is unattributable to either party. The insurance clause effectively protects the landlord and tenant alike; the landlord will be able to effect a rebuilding or renovation job to the same standard as before the damage, while the tenant can exit the agreement having secured the minimum standard of cover.

Common terms used

Most tenancy agreements will contain a clause or addendum pertaining to insurance. Often such clauses will require both landlord and tenant to carry certain types of insurance. The type of policies and coverage obtained may vary depending on the nature of the premises in question, type of business operated and who is paying for the premiums.
Standard insurance requirements that are typically found in a retail, office or commercial tenancy agreement include insurance that would typically be carried on a building owned by landlord (known as Building Insurance), Liability Insurance (which protects against third party claims), Rent and Legal Expense Insurance (insuring against loss of rental income and/or legal costs arising out of landlord/tenant disputes) and Contents/Equipment Insurance (to insure a tenant’s contents, fixtures and growth). Policies may also be required to be placed with reputable insurers licensed in the province with minimum coverage amounts.
The type of insurance you are required to obtain will be dependent upon the circumstances surrounding your tenancy; for example, where you are renting office space you may not be required to obtain equipment insurance.
The following are common conditions you may see in a tenancy insurance clause. Failure to obtain the necessary coverage and/or comply with conditions may result in a breach of the tenancy agreement and potential loss of the tenancy entirely. It is therefore important to read the following (and any other insurance requirements in your tenancy agreement) carefully and be sure to meet all requirements.
(a) All insurance policies obtained must provide for waiver of subrogation against landlord.
(b) Increased coverage limits (noting there may be some limits below which landlord will not accept).
(c) All insurance policies must be underwritten by a reputable company.
(d) Additional insured coverage for the benefit of landlord must be added to landlord’s insurance policies.
(e) Tenants Insurance Certificate; i.e. tenants must upon written request provide landlord with a Certificate of Insurance setting out particulars of such insurance.

Legal implications and compliance

Legal requirements for insurance clauses in tenancy agreements may vary by jurisdiction, but generally speaking, they need to be in accordance with any applicable landlord and tenant statutes. In many jurisdictions, there may be specific requirements surrounding the extent of coverage that needs to be held by landlords or the breadth of coverage that needs to be offered to tenants in terms of both contents and liability coverage. In Canada, depending on the province or territory, there may be statutes, regulations or case law that specifically address the issue of insurance clauses in a tenancy agreement . For example, under the Saskatchewan Residential Tenancies Act, 2006, it is mandatory that residential tenancy agreements contain an insurance clause disclosing whether insurance has been obtained by the landlord and advising the tenant to obtain his, her or its own insurance coverage. However, in British Columbia, while it is relatively common to see an insurance clause in a residential tenancy agreement, there is no specific statutory requirement to include such a clause.

What happens when there is a problem

In the event of a dispute or other issue with regard to the insurance provision in a tenancy agreement, following steps should be taken:
Tenants

• Thoroughly review the insurance clause. If you are unsure of your rights and responsibilities speak to lawyers or the relevant insurance provider (where there is a named insurance provider).
• Raise your concerns with the landlord in writing giving detailed reasons.
• If you are not satisfied following a discussion with the landlord, or you are unable to speak with the landlord, consider discussing your options with your lawyers. If the landlord’s actions are unfair or unreasonable you may have a claim for damages or an injunction.

Landlords

• Thoroughly review the insurance clause. If you are unsure of your rights and responsibilities speak to lawyers or the relevant insurance provider (where there is a named insurance provider).
• In the event of a claim being made or becoming aware of a potential claim, as soon as possible notify the insurer of circumstances that may give rise to a formal claim.
• Keep a record and take all reasonable steps to mitigate the loss.

Negotiating the insurance clause

Careful attention to the wording of the insurance clause is vital. Therefore, once the parties have reached agreement on the appropriate insurance policy, specific questions should be asked: Who pays for the policy terms and any amendments? Who pays the annual premiums? How will the parties pay for any excesses, or changes to the reinstatement value? The price of the amendments to the insurance clause can be reduced, potentially by changing the main insured named on the policy or the insurer, or by agreeing on how it will operate in practice between the parties. Each party should seek their own independent insurance advice to try out different options to understand the price of each and identify the most cost-effective. Insurers will price accordingly if an insured can demonstrate that they have done the legwork and committed to a course of action. This is particularly relevant when the tenant is responsible for insurance, where the lease specifies that the tenant must put the insurance policy in place and keep it up to date at its own cost. In some cases, where they are responsible for insurance, tenants may decide to use their parent company’s policy and pay the premium. Equally, landlords can decide to adopt the tenant’s policy — but be aware that if the landlord is insuring only the building (i.e . not the tenant’s contents), the landlord must not be the main insured on the policy, as this can result in the tenant being unable to claim effectively for damage to the contents. Consideration should also be given to whether the insurance policy should be re-inspected as part of an RICS service charge review, as any unamortised costs will be split between the parties. The landlord’s insurance broker could be called in to challenge new premiums which appear excessive or vague, or if there have been constant increases over a number of years. An alternative to the mechanics of the usual insurance clause is for the insurable interest to be defined, with the landlord requiring the tenant to take out ‘All Risks’ insurance on the first request in respect of those defined interests only. In such a situation, the operative wording should focus on the type of risk the landlord wants to cover, not the indemnity value. If it is necessary to value the property to go in the insurance clause, this process should be conduced carefully. The mechanism could be a percentage increase on the last valuation — say, five per cent — or it could be an independent surveyor instructed by the landlord. Landlords and tenants should consider the implications if this were to be amended at a later date, as there does not appear to be a precedent in use in the market which is used as the basis of valuation by all insurers.