Author: VU Faculty
The position of many of the VU faculty on triple net leases is well known...many of us abhor them. However, they are an unfortunate fact of life. If your tenant must sign a lease making him or her responsible for insuring only portions of a building such as glass or HVAC units, what is the best way to insure such property? Based on the number of "Ask an Expert" questions we get on this subject, the answer may surprise you.
"I have a problem. I have an insured that has sustained a glass loss caused by vandalism. The glass was damaged by an airgun. The building is leased and under the lease, my insured is responsible for the glass and doors. Coverage for the insured is written under an endorsed ISO Building and Property Coverage form CP 00 10 10 00.
"The company adjuster has denied coverage based upon his assertion that glass is not 'your business personal property.' I believe that coverage exists based upon 'leased personal property for which you have a contractual responsibility to insure.' I have had a number of glass losses paid for tenant occupied properties.
"If there truly no coverage for this loss, how can coverage be provided for the lessee?"
In another article, we discuss a number of issues with triple net leases: Complying with Triple Net Lease Insurance Requirements. If you search the VU for "triple net," you'll find even other articles about this pervasive issue. The problem you have with the approach you're suggesting is that, by most definitions, building structural components are not "personal property." The VU faculty provides the following commentary:
If the glass is affixed to the building, it doesn't fall under personal property. If building glass coverage, and other liabilities, are imposed on the tenant you add property and glass coverage accordingly.
Glass that is part of the building is not personal property. The form says in the RC optional coverage: In addition, where applicable, under the terms of this Replacement Cost Optional Coverage, tenants' improvements and betterments are not considered to be the personal property of others.
Choices include (depending upon the agreement of your underwriter): The Glass Coverage Form that was in ISO until the 2000 revision, company endorsement that allows a tenant to insure glass when required in a lease, put Glass on the dec. page with a separate limit, change the lease to not have the tenant responsible, use a BOP which includes exterior glass as one of the five items blanketed together in the Business Personal Property description.
The insurer is correct. Since the building is not covered property, the building glass is not covered. If you wrote a BOP, it could include building glass. Either get glass insurance endorsed from your insurer or get separate glass insurance. It is also possible to add a small limit of building coverage to cover glass damage.
Unless the tenant plans and is able to take the glass with him when he moves, it's real property and not covered as currently insured. The most often overlooked way to cover property made the responsibility of a tenant to insure in a triple net type lease is to use the CP 00 10 that you're already writing on his business personal property. You simply determine the RC value of the glass and/or any other property the tenant is required to insure (e.g., HVAC equipment is a common insurance requirement), then describe it with that limit of insurance under Coverage A.
Many people mistakenly assume that Coverage A can only be written on entire buildings or distinct structures, particulary with regard to meeting coinsurance requirements. The policy applies to "covered property" and "covered property" is whatever you describe on the property declarations page. I'd be inclined to cover as much of the tenant's property as possible under Coverage A (in accordance with the policy provisions for covered property) since the building rate is probably going to be less than the contents rate.