Finding a home for your business can be a daunting task. Not only are the location and the cost of the location important, but it is also crucial that all of the terms and conditions contained within your lease will benefit both you and your landlord. One of the terms that many people overlook is subrogration. Understanding this term and why it may be important to get your landlord to agree to waive it may be deciding factor in the future on whether or not you are able to stay in business.
What Is Subrogation?
Subrogation is a common term in the insurance industry. This basically gives one person the right to be substituted for or take the place of others. The visual picture that is often painted is that it allows someone else to step into your shoes to make a claim against the person who has caused the damage.
In the case of your insurance company, once they have paid your claim, it gives them the right to go after a third party to be reimbursed for some or all of what they have paid out to you. Subrogation is normally done one of three ways:
- As a part of the law
- As a part of a contract
- By statute
Of course, in the case of your commercial lease this right is normally a part of your contract and can be waived by:
- You, as the tenant
- Your landlord
- Both of you
While not all types of insurance claims may be subrogated, some of the most common types that are include property damage claims.
Who Will Pay For What?
When you sign a commercial lease, you are often required to provide proof of insurance and may even be required to pay your share of the landlord's insurance. While your landlord will normally have a policy that will cover any damages that occur to the building itself, you are required to provide insurance to cover the contents of your business. This insurance allows you each to be reimbursed by your insurance company for any losses you may incur.
If you cause significant damage to the property, the insurance policy carried by the landlord will reimburse the landlord for the cost of these damages. Unfortunately, under subrogation the insurance company may then come after you to be reimbursed.
The same is true if some type of structural defect, such as a busted pipe, causes the contents of your business to be ruined due to the negligence of your landlord. In this case, your insurance company will reimburse you for your loss, but then they may go after your landlord.
Why Is Subrogation Not Always The Best Idea?
If your landlord's insurance company sues you, the expected reimbursement may be enough to damage or even put you out of business. This would mean a loss of income for this landlord, because if you are no longer in business you would have no need for a commercial space.
If your insurance company sues your landlord, this could cause disharmony among the two of you. This could result in you being evicted or having to pay higher rents in an effort for the landlord to recoup their losses.
This is often avoided by you both agreeing to add a provision to your lease agreeing to waive your subrogation rights for any claims that will be covered by your respective insurance companies. If this is properly drafted, it will keep either insurance company from pursuing reimbursements for any claims that have been paid out.
If you are interested in interjecting a waiver of subrogation into your commercial contract, discuss this with your real estate attorney. They will be able to review the specifics of your business, your insurance policy, and the terms of your lease. After a thorough review, they will let you know whether the waiver will be in your best interest.