Liability Coverage for Damage to Rented Premises

Close-up of fire and flames
Image courtesy of [Alex Henley / EyeEm] / Getty Images.

Virtually all general liability policies include a coverage called Damage to Premises Rented to You. This coverage is automatically provided under Coverage A, Bodily Injury and Property Damage Liability. As its name suggests, it covers claims against an insured tenant for damage the tenant has caused to premises rented from a landlord. Here is an example.

Example

Ted Thompson owns Thompson's Machining, a machine shop that makes metal parts for farm implements.

Ted's business operates out of a building he rents in an industrial part of Pleasantville. His business is insured for liability under a standard general liability policy.

Late one afternoon, an employee of Ted's is using a welding torch to repair a damaged metal part. Unbeknownst to the worker, a spark from the welding torch has flown into a nearby trash can. The trash has begun to smolder, but no one in the shop notices the smoke.

Ted's employees leave for the day, and Ted locks up the shop. Two hours later, the trash ignites. The fire spreads to the floor and one wall of the shop. By the time the fire is extinguished an hour later, the building has sustained $75,000 in fire damage. Ted subsequently receives a demand from his landlord to pay the cost of repairing the building. Fortunately for Ted, the loss should be covered under the machine shop's general liability policy.

What are Premises?

In legal parlance, the term premises means land and any buildings or structures that are attached to the land.

Leased premises may be a building or a portion thereof. Many small businesses rent one section of a building rather than the entire structure. Whether you rent an entire building or only a portion of it, the physical address of your rental property should be listed in the declarations portion of your liability policy.

Coverage Can Be Confusing

Damage to Premises Rented to You coverage can be confusing. For one thing, it is difficult to identify in the policy. It is provided by exceptions to certain exclusions listed under Bodily Injury and Property Damage Liability Coverage. Secondly, Damage to Premises Rented to You coverage actually consists of two coverages:

  1. Coverage for claims or suits that arise from fire damage to rented premises
  2. Coverage for claims or suits that arise from damage by any cause other than fire, to premises or their contents rented for seven or fewer days

This article focuses on the first coverage, fire damage to rented premises. The second coverage, damage to premises by causes other than fire, is explained in a separate article.

Fire Damage to Rented Premises

Claims or suits that arise from fire damage to rented premises are covered by an exception to many of the exclusions described in Coverage A. This exception usually appears at the end of the Coverage A exclusions.

The exception affords coverage for claims or suits arising out of property damage by fire to premises rented to you or occupied by you without a lease with the owner's permission. Only fire damage to premises is covered.

Covers Legal Liability Only

The fire damage coverage that is provided under Damage to Premises Rented to You applies only if you are legally liable for the damage. That is, the fire damage to your rented (or occupied) premises must have been caused by your negligence.

For example, suppose that you have rented office space in a building under a five-year lease. Late one night, a violent thunderstorm breaks out. Lightning strikes the building and causes a fire in your office space. Lightning is considered an act of God, for which you are not legally liable. Thus, your policy will not cover any demand against you to pay for the fire damage.

In the Thompson's Machining scenario described above, Thompson's Machining is liable for the fire damage to the rented premises because the fire was caused by an employee's negligence.

The employee should have known that a welding torch can produce sparks, and he failed to prevent a spark from entering the trash can.

No Contractual Liability Coverage

Damage to Premises Rented to You coverage is subject to the contractual liability exclusion under Bodily Injury and Property Damage Liability. No coverage is provided for liability you assume under a lease to indemnify the landlord for fire damage to the rented premises. That is, if you are obligated to pay for fire damage to a building solely because of a contract you signed (and not because of your legal liability), your liability policy will not cover any claim that results.

For example, suppose you rent a building. You sign a lease in which you assume liability for any fire damage that occurs to the building during the term of your lease (whether or not the fire results from your negligence). Faulty wiring in the building causes a fire that damages the structure. You may be contractually obligated to repair the damage under the lease. However, the cost of the repairs will not be covered under your liability policy because you are not legally liable for the fire.

Excess Coverage Only

The coverage provided for fire damage to rented premises is not a substitute for commercial property insurance. Your landlord (or you, if required by your lease) should insure the building against physical damage by purchasing a commercial property policy.

Note that the fire damage coverage described above applies on an excess basis. If the damaged building is insured under a property policy, your liability insurer will pay a claim after the property insurance has been used up.