What Does Lessor’s Risk Only Insurance Mean?
Learn about Lessor's Risk Only insurance, vital for commercial property owners to safeguard against unique liabilities when leasing space.
Property ownership carries inherent risks and liabilities, especially in commercial leasing. Owners of commercial properties like office buildings, retail centers, or warehouses face unique challenges when leasing space. Specialized insurance coverage is necessary to protect these investments. One such policy is “Lessor’s Risk Only” (LRO) insurance.
Understanding Lessor’s Risk Only Coverage
Lessor’s Risk Only (LRO) insurance is a commercial general liability policy designed for property owners who lease space to tenants. It is also commonly referred to as landlord insurance. This coverage applies when the property owner maintains limited operational involvement in the tenant’s daily business activities. LRO covers the property owner’s liability for bodily injury or property damage on the leased premises, but only in areas the lessor controls.
The scope of LRO coverage focuses on common areas and the building’s structural integrity. This includes spaces like lobbies, hallways, stairwells, shared restrooms, and parking lots. It also extends to the building’s foundational elements. The policy protects the property owner against claims from incidents like slip-and-fall accidents, fire, water damage from building systems, or vandalism in these shared or landlord-controlled spaces.
The “risk” in Lessor’s Risk Only refers to the property owner’s liability exposure. For instance, if a pipe bursts in a common area and causes damage, LRO covers the resulting claims. This insurance protects the property owner from legal and financial repercussions stemming from incidents within the parts of the property they manage or control. Eligibility for LRO requires that the property owner occupies no more than a small percentage, typically 25%, of the total leased commercial space.
What Lessor’s Risk Only Does Not Cover
While LRO provides protections for property owners, it has clear limitations. LRO does not cover liabilities from the tenant’s direct business operations, activities, or property within their leased unit. For example, if a customer is injured inside a tenant’s retail store due to the tenant’s negligence or faulty equipment, LRO would not cover that claim.
LRO also does not cover damage to the tenant’s personal property, such as inventory, equipment, or fixtures. Tenants are responsible for securing their own commercial general liability (CGL) or business owner’s policy (BOP) to cover their operations, assets, and liabilities within their leased space. LRO does not provide coverage for physical damage to the building itself; separate commercial property insurance is necessary for perils like fire, theft, or weather-related damage.
Exclusions include damages from a landlord’s criminal negligence or intentional acts. Normal wear and tear is not covered. Lease agreements play a significant role in defining responsibilities between the lessor and lessee, outlining which party is accountable for maintenance, repairs, and insurance coverage.
Why Lessor’s Risk Only is Essential
Even when tenants carry their own comprehensive insurance policies, Lessor’s Risk Only insurance remains a protection for commercial property owners. Property owners retain liability for their premises, particularly for common areas and the building’s structural components. This “retained liability” means a property owner can still be held responsible for incidents in these areas, regardless of tenant insurance.
Consider scenarios where LRO coverage proves valuable for the property owner. If a visitor suffers a slip-and-fall accident in a shared hallway, building entrance, or parking lot due to a hazardous condition, the property owner could face a lawsuit. Similarly, injuries or property damage caused by a structural defect of the building, such as a collapsing ceiling in a common area or faulty stairs, would fall under the property owner’s liability.
Claims arising from failures in the building’s core systems, like a burst pipe in a common wall or a fire originating from the building’s HVAC system that impacts multiple tenants, highlight the need for LRO. This insurance protects the property owner from lawsuits and financial losses associated with these retained liabilities. LRO ensures property owners are not solely reliant on a tenant’s insurance policy for incidents under the landlord’s direct control or responsibility.