Understanding Insurance Coverages and Controlling Insurance Proceeds A Primer for Landlords and Lend

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Understanding Insurance Coverages and Controlling
Insurance ProceedsA Primer for Landlords and
Lenders

• Lawrence G. Lerman, Esq.
• Lerch, Early Brewer, Chtd.

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Types of Insurance

• Property Insurance
• a/k/a casualty, hazard or all-risk insurance
• Covers loss and damage to real or personal
  property

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Property Insurance

• Basic Form
• Broad Form
• Special Form (used to be all-risk but that
  term was replaced 15 years ago with special
  form)
• Special Form property insurance can be expanded
  by endorsement

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Common Endorsements

• Additional coverage is available by purchasing
  endorsements such as
• Flood
• Glass
• Debris removal
• Crime
• Equipment or mechanical breakdown
• Mold or fungus, wet and dry rot and bacteria
• Terrorism
• Ordinance or law coverage

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Amount of Insurance Coverage

• Replacement cost
• Cash value
• Co-insurance (typically 80 of value at time of
  loss)
• Agreed Value endorsement

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Agreed Value Endorsement

• Insurance company agrees that the policy limit is
  sufficient to waive co-insurance (used with cash
  value and replacement value policies)

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Liability Insurance

• Covers injuries you cause to third parties
• Includes cost of defending/resolving a suit
• Coverage stated per incident and per year (e.g.
  1,000,000/2,000,000)
• Specialized forms include
• Errors and omissions (malpractice)
• Directors and officers liability
• Property damage

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Business Interruption/Rental Loss Insurance

• Usually supplements property insurance
• Business interruption insurance covers loss of
  business income during a casualty
• Rental loss insurance covers landlord for loss
  of rent during a casualty
• Can include contingent business interruption
  where business is interrupted due to casualty at
  anothers business
• Can include extra expense of relocating

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Lenders and Landlords Coverages

• Additional Insured (different from Additional
  Named Insured)
• Allows third party a direct right under the
  insurance policy
• Third party is entitled to immediate defense
  under the policy, as opposed to being indemnified
  later by the named insured
• Not subject to defenses insurance company may
  have against insured or insureds obligations

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Lenders and Landlords Coverages

• Loss Payee
• Receives property insurance proceeds
• Subject to insurance company defenses against
  named insured

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Lenders and Landlords Coverages

• Insured Mortgagee (real property)
• Lender Loss Payee (personal property)
• Lenders coverage not subject to defenses
  insurance company may have against named insured

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Certificate of Insurance

• The Association for Cooperative Operations
  Research and Development (Acord) publishes
  forms used to describe coverage
• Acord 28 Commercial Property Insurance
• Acord 27 Personal Property Insurance
• Acord 25 Liability Insurance

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Lender Insurance Issues and Requirements

• Standard non-contributory mortgagee endorsement
• 30 days prior written notice of cancellation or
  termination
• A.M. Best Company ratings
• Policy Rating A- or better
• Financial Class VI or better

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Insurance Company Ratings
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Insurance Company Ratings
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Restoration and Casualty Proceeds

• Options
• Proceeds paid to borrower
• Proceeds paid to lender and disbursed by lender
  to borrower as construction draws under
  construction loan
• Proceeds applied to loan balance

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Landlords Insurance Issues

• Scope of Coverage of Landlords and Tenants
  insurance
• Who should insure the tenants improvements?
• Avoid gaps in coverage!
• Waiver of Subrogation

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Waiver of Subrogation

• Allocate risks and avoid duplicative insurance
  costs, rather than focusing on fault

Neither the landlord nor the tenant will be
liable (by way of subrogation or otherwise) to
the other party (or to any insurance company
insuring the other party) for any loss or damage
to any property of the landlord or the tenant,
respectively, that is covered by insurance, even
if the loss or damage is due to the negligence of
the landlord or the tenant and their respective
agents, employees, customers or guests. This
mutual release shall remain in effect only if the
applicable insurance policies of the landlord and
tenant contain either an endorsement stating that
this mutual waiver will not affect the right of
the insured to recover for any losses or damages
under the policy or a standard insurance company
waiver of subrogation provision.
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Tenants Insurance Issues

• Tenants liability insurance and lease
  indemnifications landlord should be an
  additional insured
• Tenants insurance should be primary and
  landlords insurance should be excess and
  non-contributory
• Tenants Personal Property
• Workers Compensation Insurance
• Business Interruption Insurance

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What Happens After A Casualty?

• Lease Issues
• Restoration of Premises?
• Right to terminate Lease?
• Rent abatement?

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Thank You
Cindi E. Cohen, Esq.
Arthur F. Lafionatis, Esq.
Larry G. Lerman, Esq.
Arnold D. Spevack, Esq.
Alison W. Rind, Esq.
Natasha R. Luddington, Esq.
Kiana I. Taylor, Esq.
Vicki R. Canales, Esq.
Michael D. Smith, Esq.
Shannon N. Mandel, Esq.