Insurance Considerations

Part 9 of a 12-part series on Legal Considerations for Your Missouri Leasing Business: What You Should Consider Now, Later, and Throughout the Process

As a caveat to this discussion on insurance, we recommend that you consult with an independent insurance agent/broker to ensure that you obtain the most appropriate type and extent of insurance coverage that your specific business will need.

Having said that, there are some general insurance issues every residential or commercial leasing business should consider.

First, foremost, and fundamentally – don’t skip over insurance and do not assume your personal policies will cover your company’s property or operations.  Most personal policies do not cover businesses.

As we discussed in the previous post on corporate formalities, one basis for a creditor to pierce the corporate veil of a company and reach the member/shareholder’s personal assets is when the company is undercapitalized. There is no hard and fast rule about what constitutes undercapitalization, but it is generally found where the company has very small funding or resources in comparison to its debts and risks commonly associated with that type of business. A leasing company’s primary risk will be in negligence liability, such as a slip-and-fall injury, as opposed to contract or product-liability issues. A court will want to see that the company has taken steps to address that type of risk – whether through substantial capital reserves or, more likely for a newly established business, an adequate insurance policy. It is also important that any such policy is held by the company itself and that the members/shareholders do not attempt to simply add the company’s property to their existing personal policies as this may be seen as improper commingling of the member/shareholder and company.

Second, require your tenant(s) to also carry coverage.

Your lease can shift primary responsibility for certain injuries and events to your tenant and require the tenant to carry an insurance policy to cover such responsibility. A tenant’s policy is not a replacement for your company’s policy, but will help reduce the risks that a claim is made against your company’s policy.

To ensure tenant compliance, your lease should clearly articulate the type and amount of insurance required, dictate that it will be primary, not secondary to the landlord’s coverage, and indicate that failure to obtain and maintain coverage will be considered an event of default under the lease. As a best practice, require the tenant to provide your company with a copy of the policy.

Third, there are different types of insurance that may be available to your company. 

Most business owners are familiar with property insurance which addresses risks to property, such as fire, theft, and weather damage; however, there are other types of coverage which may be useful for your company. The first to consider is a general liability policy which is designed to cover legal issues related to an accident, injury, or negligence claim. If you employ an employee to help manage your property or make repairs, you may want to consider workers’ compensation insurance which will address medical treatment, disability, and death benefits for that employee. Finally, you may also want to consider business interruption insurance which is designed to replace lost rental income in the event of a disaster or other event.

Beyond the categories of insurance types, we also strongly recommend you fully understand the scope of coverage your specific policy provides. For instance, property insurance generally comes in two different forms: all-risk policies, which will cover a wide-array of events except those excluded in the policy, and peril-specific policies, which will cover losses only to those events listed in the policy.

These items are just three of the many insurance considerations that your company should evaluate before and during its operations. Consultation with your agent/broker is strongly recommended to ensure you have taken appropriate steps to manage and minimize the risks associated with leasing real estate.

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This post is part of a series designed to help business owners understand and navigate the various pitfalls and legal considerations of real estate leasing. If you would like to learn more about insurance considerations for your business, one of our real estate attorneys would be happy to meet with you.

In the next post, we will identify several issues you will want to consider when drafting your lease agreement. If you would like to go back and re-read any of our earlier posts, you can find links below.

Introduction
Part 1: Do I Need a Legal Entity?
Part 2: What Type of Legal Entities are Available?
Part 3: Tax Treatment Considerations When Selecting Your Entity
Part 4: Your Entity’s Governing Documents
Part 5: Operational Considerations – Purchasing Real Estate – Title Insurance
Part 6: Operational Considerations – Purchasing Real Estate – Indenture Review
Part 7: Operational Considerations – Purchasing Real Estate – Loan Documentation
Part 8: Observing Corporate Formalities
Part 9: Insurance Considerations
Part 10: Drafting the Right Lease Agreement
Part 11: Litigation Considerations
Part 12: Should I Employ an Attorney to Assist my Real Estate Business?

Posted by Attorney Michael J. McKitrick. With over 30 years of hands-on commercial litigation and transactional law experience, McKitrick’s practice encompasses business and transactional advice, commercial real estate matters, and regulatory and practice management guidance for health care professionals. Most of his clients are in the medical, financial services, and manufacturing sectors.