A Comprehensive Guide to Lessor's Risk Insurance

Lessor's Risk Only (LRO) insurance protects property owners who lease their commercial or residential buildings to tenants and covers property damage and liability risks that a building owner may face arising from ownership.

RPS Area Vice President Robert Scarff provides an overview of the policy, including what's covered and tips for agents when sending account submissions.

What Does Lessor's Risk Insurance Cover?

An LRO policy insures a physical structure against damage from covered perils, like fire or windstorms.

"The property owner's liability applies to common areas, like lobbies or parking lots, while tenant liability covers incidents within their leased spaces. For example, a slip and fall in a lobby is generally the owner's responsibility," Scarff says.

Tenants are responsible for their Property coverage for business contents and Liability insurance for risks associated with their business activities within the rented space.

Key Property Considerations for Lessor's Risk Insurance

In evaluating a risk, underwriters look at the following:

Type of tenant and operations: Scarff explains that the tenant's business type heavily influences the risk level.

"For example, an office tenant presents a lower risk than a restaurant or manufacturing tenant with equipment that could create fire hazards. If the building has mixed tenants (e.g., office, retail and restaurant spaces), insurers often rate the entire building according to the riskiest tenant, as hazards can spread across connected units. Some insurers may offer flexibility by treating an account as a mixed-use building rather than a single high-risk operation, potentially lowering the rate somewhat."

Property loss history and location: A solid record with minimal or no past claims can improve the property's insurability and rate. Additionally, the building's location will affect premiums, particularly in areas prone to natural disasters like hurricanes, earthquakes or wildfires.

Liability Provisions

The owner's liability risks are managed by requiring tenants to add the building owner as an "additional insured" on the tenant's Liability policy, which can help cover claims arising from tenant operations.

"Some property owners may also require 'primary and non-contributory' wording on tenant policies, ensuring that tenant coverage takes precedence without the owner's policy contributing to losses," says Scarff. "A 'waiver of subrogation' clause prevents the tenant's insurer from pursuing the landlord for reimbursement, adding an extra layer of protection."

Tenants may also be required to carry higher Liability limits and to obtain Excess or Umbrella coverage to meet the owner's risk threshold.

How to Prepare a Lessor's Risk Submission

A well-prepared submission is essential for a favorable response from insurers. Here's how to strengthen an LRO application:

Detailed rent roll: Provide a rent roll listing all tenants, their business types and their suite numbers.

"Insurers need this information to assess the overall risk and may research individual tenants if necessary. Detailed tenant information supports accurate rating and can avoid pricing the entire building at the rate of the highest-risk tenant," says Scarff.

Clear tenant operation descriptions: Outline each tenant's specific activities, particularly if there are mixed-use operations. Identifying office spaces versus high-hazard businesses (like restaurants or gyms) can favorably clarify the building's exposure and impact rates.

Location considerations and risk mitigation: Specify the building's geographic risks (like proximity to wildfire zones or flood plains) and any disaster preparedness efforts. If a property is in a high-risk area, having backup plans or additional safety measures can improve submission quality.

Comprehensive loss history: Include the property's loss history, detailing any previous claims and steps taken to mitigate future risks. A clean loss history indicates a lower-risk property, which can positively affect rates.

Description of the building's maintenance and safety measures: Highlighting routine maintenance, security systems, fire prevention methods and any other proactive measures the owner takes to protect the property can make the building more attractive to insurers.

Ensure required endorsements: Outline required endorsements (e.g., additional insured, primary and non-contributory, waiver of subrogation) and ensure these align with the lease agreements.

"These endorsements protect the owner from certain liabilities and make the property easier to insure," explains Scarff.

LRO insurance is a vital tool for protecting property owners from the unique risks of leasing to commercial tenants. Property owners and agents can secure favorable terms that ensure financial and operational stability by understanding the nuances of LRO coverage, staying informed about tenant activities and sending detailed submissions.