Most commercial landlords require new tenants to purchase a property insurance policy that will provide coverage during the tenants’ lease period. By requiring the tenant to purchase property insurance, the landlord does not bear the responsibility of purchasing a broad, all-encompassing insurance policy – an “all risk” policy – that would cover every possible activity that could take place on the landlord’s property. All risk policies tend to be expensive, and instead of passing that cost to the tenant, the tenant can purchase a less expensive insurance policy tailored to his business. However, as the landlord in the case below discovered, just because a tenant purchases an insurance policy does not mean all the landlord’s property interests are properly covered.
In Scottsdale Ins. Co. v. Mason Park Properties LP, 249 Fed.Appx. 323, 2007 WL 2710735 (5th Cir. 2007), the commercial tenant’s insurer brought action against the tenant, landlord, and tenant’s insurance agent, seeking a declaratory judgment regarding the rights to proceeds of tenant’s commercial property insurance policy for property losses resulting from a fire at a leased restaurant. Mason Park Properties LP (“Mason Park”) was the owner of the building in which Taste of Katy was a tenant. Taste of Katy’s lease agreement required it to secure insurance designating the landlord as a loss payee for property insurance and as an additional insured for commercial general liability insurance. On July 12, 2004, a certificate of insurance was issued showing that the tenant had $1,000,000 worth of commercial general liability coverage, $100,000 worth of property damage coverage, and it listed Mason Park as a “certificate holder.”
On November 1, 2004, Taste of Katy made a claim in the amount of the policy limits for losses due to a fire. Seemingly ignoring the certificate of insurance listing Mason Park as a “certificate holder,” the United States Court of Appeals for the Fifth Circuit (Texas) affirmed the district court’s decision that the landlord was not covered under the property coverage portion of the tenant’s policy. The Fifth Circuit found that Mason Park was not covered because it was not properly listed under the loss payable provision:
The loss payable provision, which modified the property coverage part, originally stated that the name and address of the loss payee was ‘to follow.’ Nothing in the loss payable provision or anywhere else gave [the insurer] notice that Mason Park was the intended loss payee.
The Fifth Circuit concluded Mason Park was not entitled to the insurance proceeds because:
[N]othing in the property coverage part indicates that Mason Park is a loss payee, an additional insured, or otherwise has coverage, [therefore] it cannot recover under the property coverage part.
As Scottsdale Ins. Co. v. Mason Park Properties, LP demonstrates, merely being a “certificate holder” will not do; the policy must explicitly state somewhere that you, as the landlord, are entitled to any insurance proceeds. So if you’re a commercial landlord, make sure that your tenants list you as a “loss payee,” or something similar, in their insurance policies. Otherwise, you might find yourself without any rights to the insurance proceeds should your property experience a loss.