What Is a Lessor Risk Policy and What Does It Cover?

Property owners, often called lessors, face risks when leasing space to tenants. While tenants typically secure their own insurance, lessors retain specific exposures that require protection. These exposures can arise from the physical structure, common areas, or even tenant actions. A lessor risk policy (LRP) is a specialized insurance solution designed to address these risks, providing financial security against potential liabilities and property damage claims.

Defining a Lessor Risk Policy

A Lessor Risk Policy (LRP), also known as Lessor’s Risk Only (LRO) insurance or landlord insurance, protects the property owner from liabilities and property damage claims originating from the leased premises. This policy is distinct from a tenant’s general liability or property insurance, focusing exclusively on the lessor’s retained exposures. It shields the landlord from financial losses due to incidents on the leased property, particularly those leading to tenant lawsuits.

LRPs are commonly used for commercial properties such as office spaces, warehouses, retail units, and apartment buildings where a significant portion, typically more than 75%, is leased to tenants. This policy is relevant when the tenant manages the daily operations and upkeep of their leased space, transferring much of the operational risk to them. Lenders often require this coverage for commercial real estate loans.

Core Coverages

A Lessor Risk Policy includes core coverages designed to protect the lessor’s interests. One aspect is coverage for property damage to the building structure. This protects the physical building owned by the lessor against perils like fire, storms, theft, and vandalism. This coverage is important, especially if a tenant’s policy doesn’t fully cover the damage or if the damage originates from areas the lessor maintains.

Premises liability for common areas is another component. This covers injuries or property damage sustained by third parties in spaces maintained by the lessor, such as parking lots, lobbies, or stairwells. For instance, if a tenant or visitor slips and falls in a common hallway due to inadequate lighting or an unaddressed hazard, the policy can cover medical expenses and legal costs. The LRP covers legal defense costs incurred by the lessor in defending against covered lawsuits, ensuring legal fees are managed within policy limits.

Important Exclusions and Limitations

While a Lessor Risk Policy offers protections, it also has specific exclusions. A common exclusion is liability arising from the tenant’s business operations, products, or services. The LRP focuses on the landlord’s exposure, not the tenant’s daily commercial activities or the risks of their particular industry.

The policy does not cover the tenant’s personal property, such as inventory, equipment, or other personal belongings within the leased space. Tenants are responsible for insuring their own contents, often through a separate business renter’s insurance policy. Certain specialized risks, like pollution liability or professional liability, are typically excluded and require separate policies. Intentional acts are also excluded from coverage.

The Role of a Lessor Risk Policy

A Lessor Risk Policy provides a layer of protection for property owners, even when tenants carry their own insurance. One primary reason for its use is the potential for gaps in tenant coverage. A tenant’s policy might lapse, be insufficient to cover extensive damages, or contain exclusions that leave the lessor exposed to liability. An LRP acts as a safeguard, providing coverage when the tenant’s policy falls short or is not applicable.

Lessors retain non-delegable responsibilities regardless of lease agreements. Liabilities related to the building’s structural integrity, common area maintenance, or inherent property defects typically remain with the property owner. An LRP specifically addresses these liabilities, ensuring the lessor is protected against claims arising from these areas. The policy also offers protection against scenarios where a tenant’s negligence leads to damage or injury for which the lessor could be held partially liable. For example, if a tenant’s actions cause a fire that damages the building, the lessor’s policy can respond to the structural damage.

This policy is useful in lease structures like “triple net leases,” where tenants assume significant responsibility for property expenses and maintenance. Despite the tenant’s obligations, the lessor retains ultimate ownership risk and requires direct protection. The Lessor Risk Policy complements, rather than replaces, the tenant’s insurance, protecting the property owner’s investment and liabilities.