In most commercial leases, the landlord and tenant obligate themselves to obtain policies of insurance against certain risks. This often includes, for the landlord, property insurance for the building and boiler equipment, liability and property policies for the landlord’s operations in the building, and coverage for loss of rental income, and, for the tenant, commercial general liability insurance, insurance for its property within the premises, and business interruption insurance.
Such obligations to obtain insurance are usually referred to as “covenants to insure”. But what is their legal effect?
In short, a covenant to insure precludes the party obligating itself to obtain insurance (the “covenantor”) – or its insurer – from successfully suing the other party to the contract (the “beneficiary”) for losses arising from risks covered by such insurance. For example, if a tenant covenants to acquire fire insurance for the leased premises and the landlord negligently starts a fire damaging those premises, neither the tenant nor its insurer will be successful in a claim against the landlord for losses caused by the fire.
A covenant to insure provides such immunity to the beneficiary even if the covenantor fails to acquire the insurance. (If the beneficiary itself suffers loss, it could also pursue a claim against the covenantor for breach of its obligation to acquire the insurance, for losses incurred against which coverage ought to have been obtained).
Moreover, the protection afforded the beneficiary by a covenant to insure, though often referred to as “tort immunity” (thus including claims in negligence), also extends to claims for losses due to breach of contract. For example, if a tenant’s breach of its contractual obligation to safely store flammables on the premises causes a fire resulting in loss by the landlord, the tenant will enjoy immunity from a claim by the landlord, provided the landlord has covenanted to obtain insurance against such loss.
Finally, a covenant to insure can operate to override an indemnity provision. For example, if a tenant agrees to indemnify its landlord for losses arising from the tenant’s introduction of hazardous materials onto the premises and the landlord suffers loss due to the introduction of such hazardous materials by the tenant, the landlord will not be able to enforce the indemnity against the tenant if the landlord was obligated to acquire environmental insurance covering such losses.
However, the immunity afforded by a covenant to insure extends only to losses contemplated by the covenant. In other words, the covenant will not protect the beneficiary against losses that fall outside the scope of the policy that the covenantor obligated itself to acquire, whether for amounts exceeding the policy limit or for losses not included within the scope of risks to be insured.
Far from being mere “boilerplate” provisions in a lease, covenants to insure have far-reaching effects that deserve careful consideration.