How to protect your interests with insurance clauses in commercial lease agreements

What are the main risks and insurance types in commercial leases? 

The parties to a commercial lease agreement can face two types of risks that they might wish to cover under an insurance policy:

• Property damage. The owner’s risk that its property would be damaged or destroyed by fire, water, vandalism or other causes. Such risk is covered by a so-called first-party insurance.
• Liability. The landlord and/or the tenant’s risk that they could be held liable towards each other or towards third parties, such as neighbours, visitors, etc. Such liability risk is covered by a so-called third-party insurance.

Liability risk between the parties. According to Belgian law:

• the landlord is liable for failing to:
  • deliver the property to the tenant and ensure the tenant’s peaceful enjoyment of it.
  • maintain the property so that it is fit for its use.
  • indemnify the tenant for (hidden) defects that affect the leased property and that prevent the tenant’s use.
• the tenant is liable for:
  • deteriorations that occur during the lease term because of fault that is (presumed to be) attributable to the tenant or that is caused by or attributable to the subtenants.
  • fire unless the tenant can prove that its occurrence is not attributable to him or her.

Liability towards third parties. The tenant and the landlord can also be liable towards third parties for:

• harm caused by their negligence or by a defect on the property (in their capacity as custodian).
• harm caused by the "theory of abnormal disturbance by the neighbourhood", which applies when the use of the property causes excessive nuisance to others.
• harm caused by the collapse of the building due to lack of maintenance or a defect in its construction (this liability rests solely with  the landlord).

The parties can take out insurance to cover these risks:

• the landlord usually takes out a fire insurance to cover fire and similar risks. This policy generally offers additional cover that protects the landlord against the above- mentioned liability towards third parties (verhaal van derden / recours des tiers) and/or (contractual) liability claims from the tenant and other users of the leased property (for example, to cover its liability for hidden defects towards the tenant).
• The tenant usually takes out a tenant's liability insurance that covers liability claims from the landlord and third parties (for example, cover for fire or deterioration of the property, as the tenant is responsible towards the landlord for this type of risk, cf. supra). This policy can also provide additional cover, such as a cover against any liability towards third parties and/or a contents insurance (inboedelverzekering / assurance contenu).

Is insurance mandatory in commercial lease agreements?

There is no statutory obligation to take out insurance in relation to a commercial lease, but most lease agreements contain an insurance clause that specifies the risks that the tenant and/or the landlord must insure against. 

TIP: The clause should also require the parties to provide proof of insurance (verzekeringsattest / certificate d'assurance) showing that the insurance is valid and covers the relevant risks, specifying the limits and mentioning the period of coverage. 

The commercial lease agreement could also require the tenant to take out an insurance not only to cover its own liability but also to cover risks that are normally borne by the landlord. Belgian insurance law allows for this through an insurance for the benefit of third parties (verzekering voor rekening / assurance pour compte). This is a mechanism whereby a policyholder takes out insurance for a property that is owned by someone else or for a liability incurred by someone else.

TIP: In such scenario, the insurance policy should expressly mention that the landlord (owner) is an insured under the policy. Otherwise, there is a risk that the landlord (owner) would not be able to claim the insurance benefit.

How can waivers of recourse help the parties?

The parties can agree to increase liability towards each other (for example, the tenant can be made responsible for all repairs), or they can limit or exclude liability towards each other, the latter through waiver-of-recourse clauses. These types of clauses prevent the parties from suing each other for harm or loss that are covered by insurance. They can also prevent the insurers from suing the other party after indemnifying their insured if they waive their right of subrogation.

Waivers of recourse can be stipulated in the lease agreement as well as the insurance agreement. Indeed, after indemnification of the loss, the insurer is subrogated in the rights and legal actions of the insured against any liable third party. However, the insurer can agree to waive this right of (subrogatory) recourse..

Various types of waivers (unilateral or mutual) can be found in lease agreements. The most common one is that the landlord discharges the tenant from its liability for fire and associated risks so that the tenant does not have to take out an insurance for that risk. In return, the tenant undertakes to compensate the landlord for the increase in the premium that the landlord would have paid to the insurer because of said discharge..

Waivers of recourse can have several advantages for the parties. They can:

• reduce the overall insurance costs, as the premium paid by one party can be lower than the sum of the premiums that both parties would pay individually.
• Cover the full replacement value of the property, as a first-party insurance policy can insure the property at its replacement value without taking into account wear and tear, while a third-party insurance policy might cover the actual value of the property only.
• preserve the commercial relationship between the parties by avoiding litigation and disputes.
• speed up the settlement of the insurance claims by reducing the number of insurers involved.

What should parties pay attention to when drafting waivers of recourse?

Waiver-of-recourse clauses can be helpful, but they also require careful attention when drafting. Some of the issues to consider are:

• if the lease agreement includes a waiver, the parties must notify their insurer as soon as possible about it because the waiver affects the risk evaluation. Otherwise, the policyholder could face serious consequences, such as the policy could be declared void, the claim could be denied, the insurer's obligation could be reduced, the insurer could seek compensation.
• if the waiver is in the insurance agreement only, the landlord can still sue the tenant under the lease (for example, if the insurance does not fully compensate the landlord for the loss it incurred).
• a waiver of rights cannot be presumed: the courts ruled that the landlord's right to pass on all or part of a fire insurance premium to the tenant does not clearly show that the landlord intended to waive recourses.
• waiver clauses are essentially limitations or exemptions of liability, so they have to be interpreted narrowly and follow the rules that apply to such clauses (for instance, they cannot be used if fraud or intentional fault is found on the part of a party, they cannot deprive the contract of its main purpose, they cannot violate the new B2B legislation on unfair contract terms, etc.).
• the waiver and the insurance cover should match: the lease agreement should state who is responsible for any deductible and should only waive recourses for the losses that are actually insured against.
• the parties should be able to check that the insurance is valid: this can be done by including in the lease agreement a duty to inform each other of any termination of their insurance policies. Some agreements go further and require the parties to include in their insurance agreement a clause that prevents the termination of the insurance contract without giving the other party one month's notice. However, insurers often reject this kind of clause in their policies.

Have you come across a waiver-of-recourse clause, and do you have any questions about it?

Are you wondering about the possible mismatch between what are being waived in your lease agreement and what are being covered by the insurance policy? 

Are you in dispute with your landlord or tenant, and do you want to know more about your rights against the other party and against your insurer or theirs? 

Contact us today. We will be happy to assist you.