Contractual Risk Transfer for Landlords

Risk management is an essential aspect of property leasing, and one method that landlords can utilize to reduce potential losses is contractual risk transfer. This legally binding strategy assigns responsibilities for liabilities and related costs to the party who may be best positioned to control the risk. Together with other risk management strategies (e.g., risk identification, analysis and mitigation), risk transfer can be a useful tool in a landlord’s overall risk management plan.

This article provides more information on contractual risk transfer mechanisms, including indemnity agreements, additional insured endorsements and certificates of insurance. It also provides tips for landlords on how to implement contractual risk transfer.

Indemnity Agreements

Indemnity agreements are contractual provisions that require one party, the indemnitor, to compensate the other, the indemnitee, for specified losses or damages. These agreements shift financial responsibility to tenants for losses or liabilities arising from their actions or negligence and can include “hold harmless” language, which limits the indemnitee’s liability.

Types of indemnity clauses include broad form, which provides an indemnity regardless of the cause of the loss; intermediate form, which provides indemnity unless the indemnitee is solely at fault; and limited form, which provides indemnity to the extent the indemnitor is responsible for the loss. When drafting indemnification clauses, it is critical to review applicable laws and regulations, as their enforceability varies across jurisdictions, and states may impose limitations through anti-indemnity statutes that restrict the use of broad form or intermediate form indemnity clauses.

Additional Insureds

Another contractual risk management technique is incorporating an additional insured requirement into the rental agreement. To be enforceable, the clause should clearly specify the necessary scope and duration of the required coverage. When landlords become an additional insured on a tenant’s policy, the tenant’s liability coverage is extended to the landlord. This means that if a claim arises from the tenant’s operations or activities, the landlord is directly covered under the tenant’s insurance policy for the resulting losses.

Additionally, if the tenant regularly utilizes third-party services on the leased property’s premises, landlords should consider requiring the third party to list the tenant and potentially themselves as an additional insured. It is important to note that insured endorsements provide different levels of coverage depending on how they are written, and various jurisdictions may have laws regarding limiting their scope.

Certificates of Insurance

Another form of contractual risk transfer that may be in a lease agreement is the requirement to provide a certificate of insurance. This document verifies that the tenant has secured a policy with adequate coverage, policy limits and endorsements required by the landlord. However, landlords should be aware that these certificates are only informational, and they do not confer rights or automatically provide notifications that a policy has changed or expired.

Best Practices for Landlords

When implementing contractual risk management strategies, landlords should draft effective lease agreements by collaborating with legal professionals to ensure clarity and enforceability within the applicable jurisdiction. They should also employ monitoring procedures to track tenant insurance compliance. Evaluating specific risks through regular assessments and tailoring contractual provisions accordingly is also important.

Conclusion      

Risk management is a key aspect of leasing property, and contractual risk transfer can be integral to a landlord’s overall risk management plan. Contact us today for additional risk management guidance.

Article Published By: Zywave, Inc.