Rented Premises: Why You Need Property Coverage

Generally, you buy property insurance to cover damage or loss to property. Your liability policy might provide some coverage…but probably not enough.

In the world of residential real estate, landlords buy property insurance to cover damage to buildings they own. If you rent a home or apartment, your renter’s policy will cover your contents and other personal belongings. If the loss or damage isn’t your fault, the landlord’s policy will cover it. But let’s say you accidentally cause a fire by leaving a pot unattended on a stove. The liability portion of your renter’s policy would cover your liability for this negligent act.

It works the same way in commercial real estate. If you rent your business premises, you’ll buy property insurance to cover your business personal property and inventory, if applicable. Your policy doesn’t cover your premises, since you don’t own them. But if you do accidentally cause fire damage to your landlord’s premises, your liability coverage would apply.

Businesses obtain liability coverage either through a commercial general liability (CGL) policy or through a business owner’s policy, which combines property and liability coverages. The CGL includes coverage for “damage to premises rented to you.” Although this coverage is automatically included in the Coverage A section of your policy, it provides only limited coverage. Damage to Premises Rented to You covers only damage due to fire, and a separate, lower limit might apply. If your business premises are damaged by any other cause, the policy would not cover you.

Damage must also be caused by your negligence, otherwise the contractual liability exclusion would apply. For example, let’s say your lease requires you to pay for any fire damage to your leased premises, even if you are not at fault. You have accepted contractual liability for fire damage. The policy’s contractual liability exclusion states it won’t pay for any loss you become obligated to pay by contract. Therefore, the Damage to Premises Rented to You coverage would not apply.

Buying tenant coverage will insure your on-premises property, but it won’t cover the building itself. Check your policy to see whether it provides “building occupied by the insured” coverage. This section covers a building you regularly use but do not own—for example, a building you lease, rent or borrow.

You’ll also want to check what “perils,” or causes of loss, your policy covers.

• Basic form policies cover losses due to common perils, such as fire, lightning, explosion, windstorm or hail, smoke, “physical contact” of an aircraft or vehicle, riot or civil commotion, vandalism, sinkhole collapse or volcanic action.
• Broad form policies cover the basic perils, plus water damage, structural collapse, sprinkler leakage, and damage caused by ice, sleet, or weight of snow.
• Special form policies, formerly called “all risk” policies, cover all perils except those specifically excluded by the policy. Typical exclusions include damage due to flood, earth movement, war and terrorism, nuclear disaster and wear and tear.

Policies can vary from insurer to insurer.