Managing Your Risk
Don't get burned if you lease office space

By Michael Kelly
NCACC Risk Management

Fire legal liability is the coverage needed to provide for the financial responsibly to your landlord if in your lease agreement or through common law you are held legally liable for fire damage to property arising out of your actions or inactions.

If a county owns a building and leases space to tenants, requiring them to purchase fire legal liability coverage is the usual solution to protect your interests. This is an often overlooked exposure waiting to surface that is best addressed before fire occurs.

Although a tenant's general liability policy may be providing property damage limits of $1 million per occurrence, you could still have a problem because the majority of standard liability policies exclude coverage for damage to property in the insured's care, custody or control. Because of this, many public liability insurance policies often will include a small sub-limit amount of fire legal liability as additional ancillary coverage. If more is needed you must request the sub-limit be increased to an amount sufficient to actually cover the total exposure. (The unendorsed NCACC Liability & Property Pool policy provides a sub-limit of $100,000 per occurrence.)

Fire legal liability addresses the issue of property damage as a result of a negligent act or omission of the tenant that allows a fire to damage their leased space. An example would be a tenant that leaves a space heater or coffee pot turned on overnight, causing a fire that damages the building. Although the tenant's general liability policy will cover a lot of the damage to the building, absent adequate fire legal liability limits it will exclude covering the damage to the space actually occupied by the tenant. This, of course, is where the majority of the fire damage is likely to be located.

Such a fire loss should be covered under the county's own property insurance policy, but if possible it is good practice to allocate such costs to the responsible party. The requirement of your tenant to purchase fire legal liability coverage will allow you to do so.

To pursue this option, you should consider the amount of coverage your tenant is required to purchase to protect your interest. Unless the tenant has some unusual improvements and/or betterments made to their space, the usual answer is determined by figuring the replacement reconstruction cost per square foot for the entire building and then multiplying that figure by the tenant's leased total square footage. This figure should be rounded up to the nearest $10,000 increment, thereby allowing for a small margin of estimating error and inflation.

In the example given, it would also be normal practice for the insurance carrier of the building owner (e.g. the county) to subrogate against the tenant's insurance carrier to seek reimbursement for paid damages if the cause of the fire is clearly the responsibility of the tenant. Likewise, the reciprocal is true and something to consider as well. The tenant's insurance carrier may seek reimbursement from the landlord's insurance carrier if the tenant suffered damage that came about under some responsibility of the landlord.

Often landlords and tenants will alleviate the issue of assigning responsibility and requiring the purchase of fire legal liability by making each party responsible for their own interests. To accomplish this, their lease agreement should dictate that each party should insure their own property for its respective replacement cost, each will mutually waive and release the other against damage to their respective property caused by the other, regardless of fault, and both agree that the mutual waiver will extend to the interests of the ultimate damaged party, i.e. the respective insurer of both landlord and tenant. This mutual covenant should dictate both landlord and tenant will obtain from their respective property insurer a waiver of the insurance company's right to subrogate against the other.

A waiver of subrogation in the leasing of property costs little or nothing and is a freely accepted alternative indemnity principal in the insurance industry. Although it goes against assigning loss responsibility to a given party, it is usually a less expensive method to address the fire legal liability exposure.

Through the process of reviewing all existing leases where the county is either the landlord or the tenant and then applying these same principals in the negotiation of any future leases, a potential problem may be circumnavigated with a prearranged, agreed upon course of action.

Michael Kelly serves as Property and Casualty Program Specialist for the NCACC's Risk Management Pools. He writes a regular column on risk management for CountyLines.