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Triple Net Leases...Revisited

Triple net leases make the tenant responsible for insuring the building or parts thereof. In another article, we discussed how dangerous these provisions can be to both the owner and tenant. Recently, an agent asked, "In the event the tenant commits arson and destroys the building, how do you protect the building owner's interest in the property under the tenant's policy?" Uh oh!

Question "We have an insured that leases a building to a tenant under a triple net lease. The tenant is responsible for insuring the entire building. In the event the tenant commits arson and destroys the building, how do you protect the building owner's interest in the property under the tenant's policy?"

Answer? Good question. Easy answer: You don't. Well, at least our faculty couldn't come up with any foolproof recommendations. In an earlier article, we discussed a number of issues with triple net leases: Complying with Triple Net Lease Insurance Requirements.

That article addressed several pitfalls anytime responsibility to insure a building is relegated to the tenant. Although such insurance requirements are standard operating procedure for many building owners, it still escapes our comprehension as to why anyone with an asset of that magnitude would entrust the insurance, and the control that goes along with it, to a tenant. Our only assumption is that a lawyer or financial adviser (neither of which knows anything about insurance) recommended this for legal, tax or other reasons.

So, let's say that the building owner's tenant has insured the building but is experiencing financial troubles that would be lessened if he were able to get some insurance proceeds on the business property he can't sell, and perhaps for the building he knowingly overinsured. Or, maybe he's just a mental defective who's mad at the landlord and wants to get even by torching the building.

Let's say the building is insured under an ISO package policy. Here's what the Commercial Property Conditions CP 00 90 says:

A. CONCEALMENT, MISREPRESENTATION OR FRAUD
   This Coverage Part is void in any case of
   fraud by you as it relates to this Coverage
   Part at any time. It is also void if you or
   any other insured, at any time, intentionally
   conceal or misrepresent a material fact
   concerning:
   1. This Coverage Part;
   2. The Covered Property;
   3. Your interest in the Covered Property; or
   4. A claim under this Coverage Part.

As you can see, if the tenant commits arson (e.g., arson), the policy is void. When you "void" a contract, it's as if it never existed. It does not matter what the landlord's "insured" status is because there is no coverage for anyone. If you owned a $2 million building, would you entrust the insurance to someone you know little, if anything, about?

Under the typical mortgage clause, there is coverage for a mortgagee if the mortgagor commits fraud or otherwise negates coverage without the knowledge, consent or participation of the mortgagee, but that's not the case here. However, there is another provision in the CP 00 90 that might be material:

CONTROL OF PROPERTY
Any act or neglect of any person other than you beyond your direction or control will not affect this insurance.

One interpretation is that this condition wouild preclude voiding the policy or otherwise denying the claim because of the fraudulent actions of the tenant. However (again), keep in mind that the TENANT is typically the "you" in a policy they've procured for the landlord. If so, then the act would not be beyond "your" control. This situation might be avoided by the tenant procuring the policy only in the landlord's name with, at best, the tenant as an additional insured, not a named ("you") insured. But that still does't resolve other problems discussed in additional VU articles on this subject...simply search the VU for "triple net" to continue your review.

So, once again, we say, "Triple net leases? Bah, humbug!"