Making Sense of Fire Legal Liability Coverage
Fire legal liability coverage is an insurance policy endorsement that covers a business for financial loss if the building it rents space in catches fire, and the spread of the fire is caused by the leaseholder or landlord. For example, if you are a tenant and your business damages the premises, even just partially, you will be responsible to repair the damage. Why you want fire legal liability protection is to save your business from bankruptcy in the event of such a loss. The Landlord will be made whole through their own insurance, and you can rest assured that you will not be bankrupt if you burn down the building .
Such insurance costs a few hundred dollars a year, yet is well worth it. As a professional, I have saved clients thousands every year on this very coverage. Whenever my client rents space anywhere for its business, I request that they send over a copy of their Business Owner’s Policy (BOP), or establishment liability insurance (commonly referred to as a BOP) so I can read through it, to see if they have fire legal liability. If not, I will usually advise the client to add that type of policy, if they don’t already have it with another insurer.
Who Should Consider Fire Legal Liability Coverage?
The next question is, "Who needs coverage?" Almost all businesses do, as well as property owners with multiple or income-producing properties. A few examples may help.
Suppose you own a small business and occupy a unit in a building owned by someone else. One night, there was a fire caused by the explosion of a boiler in a tenant’s space two floors above you. The resulting water and smoke damage affected your contents to the tune of $15,000. The building owner could have lawfully sought recovery from its tenant and/or the tenant’s insurer for the damage that extended to your space. Purchasing fire legal liability coverage would save you from having to potentially pursue compensation from the owner’s insurance carrier or potentially sue your landlord for negligence (assuming a fire caused by a boiler explosion was not otherwise expected or excluded from coverage by the lease terms).
Consider another example: A commercial real estate developer is building a garden apartment complex on a former supermarket site. Another property adjacent to the site is a grocery store. During construction a backhoe operator accidentally breaks open the grocer’s water line, causing flooding and damage estimated at $30,000 to the grocer’s contents. Both the grocer and the developer have fire legal liability coverage that may be utilized by the grocer to recover his damages. The grocer cannot necessarily collect from the contractor directly if he has agreed to waive subrogation rights in his lease.
In the third example, a nonprofit animal shelter leases space in an old warehouse building in an urban neighborhood that is undergoing gentrification. The landlord agrees to upgrade the heating and electrical systems and install new fixtures and finishes with a $500,000 capital improvement budget. In the course of construction, a worker accidentally ignites a wall stud that soon results in a blaze, leaving the shelter temporarily displaced and in need of $150,000 worth of interior reconstruction to allow it to recommence operations. Fire legal liability coverage may respond to the claims in this case instead of dragging the shelter through possibly expensive litigation with the plumbing contractor who struck the match that started the fire.
Limits of Coverage and Exclusions
As with any type of property insurance, the coverage provided under fire legal liability policies is subject to certain limitations. Notably, the limit of coverage typically expressed in a fire legal liability policy forms part of the aggregate limit of coverage available under a standard commercial property package policy. This means that the liability attached to that policy for fire legal liability coverage will reduce the amount of coverage available for losses that fall under other types of coverage offered by the policy, including property damage losses that arise from an insured’s acts or omissions. For example, if fire legal liability coverage is exhausted to pay claims arising from liability for fire damage, the amount available for coverage may be reduced for liability arising from the damage or destruction of covered property in a covered "cause of loss."
The exclusions contained in a fire legal liability policy are things that insurers are typically unwilling to cover because their risks of exposure are too high or unpredictable. Some exclusions include:
A well-tailored fire legal liability policy can be a valuable tool for protecting against significant financial loss while still allowing a landlord/developer to maintain liability insurance coverage for other types of claims.
How to Select a Fire Legal Liability Policy
When purchasing fire legal liability coverage, there are many factors to consider. An important first step is a careful review of your operations and any insurance policies you currently hold. Some policies may already cover liability due to fire, while others—including commercial general liability and property policies—may contain exclusions for fire and should be reviewed carefully. Once you’ve identified the coverage you need, consider the following:
insurance company ratings
the insurance company’s A.M. Best rating, which gives an indication of the insurance company’s financial health
the policy limits offered by the insurer in relation to the value of the property to be protected
policy deductibles, which will determine the out-of-pocket cost of a claim
whether you can pay more in premiums to reduce your policy deductible
any exclusions or sub-limits that might negatively impact your coverage
included or excluded supplementary coverage, such as loss of rental income
the length of time that your property will be covered, especially if the insurance policy is for a short term (e.g., three or six months) and no renewal is included
the insurer’s reputation within the industry and within your community
the insurer’s claims handling policies and procedures
the insurer’s appraisal process
your insurance broker’s experience and reputation
any restrictions on tenants, such as a requirement that certain fire prevention measures be carried out
the importance of additional insured status
additional insured status, which obligates the insurer to pay any damages that a tenant is obligated to pay because of fire damage to your property
whether additional insured status applies to your insurers in the event of a loss
the key person rule, which ensures that your policy will be renewed for a full term once the key insured person arrives at their new location.
The Fire Legal Liability Claims Process
When a fire causes damage to another party’s property that the insured is liable for, it triggers the fire liability coverage and the carrier has a certain number of days to accept and pay the claim. Typically, the claim process for this type of liability coverage involves several steps. First, the insured should promptly report the incident to the insurance carrier, who will send out an adjuster to evaluate the damage and determine the amount of the loss. The adjuster will often work with the insured to assess the extent of the damage and any necessary repairs . This may involve collecting documentation such as photographs, repair estimates or invoices. If additional coverage is needed beyond what is provided, the insurance carrier may make a settlement offer to the insured. It’s important for the insured to carefully review the offer to ensure it covers all losses. This is the point at which the insured should negotiate any issues that need to be discussed to ensure the claim is resolved fairly and satisfactorily. Once a settlement is reached, the carrier will issue payment to the insured after filing a proof of loss that details the damage.
Adding Fire Legal Liability Coverage to Other Property Policies
You can oftentimes integrate fire legal liability insurance with other coverages, like general liability insurance and property insurance as part of a larger risk management and loss prevention program.
There are two possible ways to do this.
The first option is that the general liability policy of the lessee or tenant will pick up fire legal liability coverage under a "leasehold interest coverage extension." This coverage is to protect against loss of rental value of real estate that arises from an insured loss. In such a situation, it would provide $100,000 protection for destruction caused by fire, such as if equipment is on fire at an apartment building and the apartment building burns down. The downside to this option is that a deductible applies to the leasehold interest coverage extension that is equal to the general liability deductible. Some general liability policies have a $1,000,000 deductible. The benefit is fair, but appropriate especially when you consider the deductible amount under the general liability policy.
The second option is to have your fire legal liability coverage on separate policy that is blanketed across multiple locations. With this option, the fire legal liability coverage will not be subject to the deductible of the general liability policy. You may, however, want to purchase a lower limit of coverage than your general liability limit. For example, if you have $1,000,000 of general liability coverage, you may want to consider purchasing $100,000 to $500,000 of fire legal liability coverage on a separate policy or endorsement. The benefit is that there is no deductible, which can be significant. For corporations, you may even be able to combine this with D&O liability coverage. It is also generally much less expensive to purchase a separate endorsement for fire legal liability coverage to a corporation directors and officers policy than standalone fire legal liability insurance.
If you have real estate holdings, consider integrating fire legal liability coverage with your other insurance policies. If you have multiple policies for separate locations, consider purchasing standard limits of fire legal liability coverage on each of them. And if you are a corporation, consider purchasing D&O insurance that may come with fire legal liability coverage.
Current Trends and Considerations
In the past few years, several trends have emerged in fire legal liability coverage. One of the most significant is the move towards sub-limits and other dollar constraints on dollar losses, rather than to attempt to include a sliding scale coverage. For example, at one time the language would be broader to include "ensuing fire," but now it is more limited to "arson by the insured." This is a significant change because "ensuing fire" language not only protects against arson or other criminal acts by employees but also for ordinary acts of carelessness defined as negligence that happen in course of the employment. The absence of the former language increases the risk for underinsured and possibly uninsured losses.
Another trend is that fire legal liability coverage is narrowing in scope over time. Where the policies previously covered "building, fixtures, permanent improvements , alterations and additions" within the real property premises leased to the insured, now carriers are excluding "buildings," but are including "fixtures" as well as "permanent improvements," and "alterations and additions," limited to that part of the real property premises "leased to the insured." By excluding buildings, the carrier is eliminating coverage for damage to the building itself by the insured’s operations, and leaving coverage for the property interest of the landlord from the policy, but excluding any loss which may be recouped as damages in a lawsuit by the landlord against the tenant. Thus, if the landlord loses its building as a result of a fire started by the tenant, the insurer’s coverage obligation under the exclusion will foreclose the landlord’s claim from being recovered under the policy. This trend is typified in the form policy language of an ISO form, CG 007 00 – 01 96.