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Understanding Insurance Coverages and Controlling Insurance Proceeds A Primer for Landlords and Lenders

Understanding Insurance Coverages and Controlling Insurance Proceeds A Primer for Landlords and Lenders Lawrence G. Lerman, Esq. Lerch, Early & Brewer, Chtd. Types of Insurance Property Insurance a/k/a casualty, hazard or all-risk insurance Covers loss and damage to real or personal property

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Understanding Insurance Coverages and Controlling Insurance Proceeds A Primer for Landlords and Lenders

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  1. Understanding Insurance Coverages and Controlling Insurance ProceedsA Primer for Landlords and Lenders Lawrence G. Lerman, Esq. Lerch, Early & Brewer, Chtd.

  2. Types of Insurance • Property Insurance • a/k/a casualty, hazard or all-risk insurance • Covers loss and damage to real or personal property 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  3. Property Insurance • Basic Form • Broad Form • “Special Form” (used to be “all-risk” but that term was replaced 15 years ago with “special form”) • “Special Form” property insurance can be expanded by endorsement 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  4. Common Endorsements • Additional coverage is available by purchasing endorsements such as: • Flood • Glass • Debris removal • Crime • Equipment or mechanical breakdown • Mold or fungus, wet and dry rot and bacteria • Terrorism • Ordinance or law coverage 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  5. Amount of Insurance Coverage • Replacement cost • Cash value • Co-insurance (typically 80% of value at time of loss) • Agreed Value endorsement 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  6. Agreed Value Endorsement • Insurance company agrees that the policy limit is sufficient to waive co-insurance (used with cash value and replacement value policies) 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  7. Liability Insurance • Covers injuries you cause to third parties • Includes cost of defending/resolving a suit • Coverage stated per incident and per year (e.g. $1,000,000/$2,000,000) • Specialized forms include: • Errors and omissions (malpractice) • Director’s and officers’ liability • Property damage 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  8. Business Interruption/Rental Loss Insurance • Usually supplements property insurance • “Business interruption insurance” covers loss of business income during a casualty • “Rental loss insurance” covers landlord for loss of rent during a casualty • Can include “contingent business interruption” where business is interrupted due to casualty at another’s business • Can include “extra expense” of relocating 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  9. Lender’s and Landlord’s Coverages • “Additional Insured” (different from “Additional Named Insured”) • Allows third party a direct right under the insurance policy • Third party is entitled to immediate defense under the policy, as opposed to being indemnified later by the named insured • Not subject to defenses insurance company may have against insured or insured’s obligations 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  10. Lender’s and Landlord’s Coverages • “Loss Payee” • Receives property insurance proceeds • Subject to insurance company defenses against named insured 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  11. Lender’s and Landlord’s Coverages • “Insured Mortgagee” (real property) • “Lender Loss Payee” (personal property) • Lender’s coverage not subject to defenses insurance company may have against named insured 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  12. Certificate of Insurance • The Association for Cooperative Operations Research and Development (“Acord”) publishes forms used to describe coverage: • Acord 28: Commercial Property Insurance • Acord 27: Personal Property Insurance • Acord 25: Liability Insurance 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  13. Lender Insurance Issues and Requirements • Standard non-contributory mortgagee endorsement • 30 days prior written notice of cancellation or termination • A.M. Best Company ratings: • Policy Rating: A- or better • Financial Class: VI or better 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  14. Insurance Company Ratings 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  15. Insurance Company Ratings 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  16. Restoration and Casualty Proceeds • Options: • Proceeds paid to borrower • Proceeds paid to lender and disbursed by lender to borrower as construction draws under construction loan • Proceeds applied to loan balance 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  17. Landlord’s Insurance Issues • Scope of Coverage of Landlord’s and Tenant’s insurance • Who should insure the tenant’s improvements? • Avoid gaps in coverage! • Waiver of Subrogation 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  18. Waiver of Subrogation • Allocate risks and avoid duplicative insurance costs, rather than focusing on fault “Neither the landlord nor the tenant will be liable (by way of subrogation or otherwise) to the other party (or to any insurance company insuring the other party) for any loss or damage to any property of the landlord or the tenant, respectively, that is covered by insurance, even if the loss or damage is due to the negligence of the landlord or the tenant and their respective agents, employees, customers or guests. This mutual release shall remain in effect only if the applicable insurance policies of the landlord and tenant contain either an endorsement stating that this mutual waiver will not affect the right of the insured to recover for any losses or damages under the policy or a standard insurance company waiver of subrogation provision.” 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  19. Tenant’s Insurance Issues • Tenant’s liability insurance and lease indemnifications – landlord should be “an additional insured” • Tenant’s insurance should be primary and landlord’s insurance should be excess and non-contributory • Tenant’s Personal Property • Worker’s Compensation Insurance • Business Interruption Insurance 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  20. What Happens After A Casualty? Lease Issues: • Restoration of Premises? • Right to terminate Lease? • Rent abatement? 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

  21. Thank You Larry G. Lerman, Esq. Cindi E. Cohen, Esq. Arthur F. Lafionatis, Esq. Arnold D. Spevack, Esq. Alison W. Rind, Esq. Natasha R. Luddington, Esq. Kiana I. Taylor, Esq. Michael D. Smith, Esq. Shannon N. Mandel, Esq. Vicki R. Canales, Esq. 3 Bethesda Metro Center • Suite 460 • Bethesda, MD 20814 • www.lerchearly.com

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