Chapter 15d Landlord/tenant

• Library: The Handbook on Additional Insureds (ABA) (2018 Ed.)

CHAPTER 15D Landlord/Tenant

Patti Potash, Alexandra Rigney, and Jennifer Mindlin

One of the relationships for which additional insured coverage is a common requirement is the landlord/tenant relationship. A landlord will place the obligation on a tenant to obtain liability and/or first-party property insurance on which the landlord is to be named as an additional insured. The landlord desires the coverage to protect itself against liability for the tenant's occupancy, lease obligations, and use of the premises, including conditions of the premises in the tenant's control.

There are several ISO forms that provide additional insured coverage for landlords on tenant's policies.¹ Each of these forms include an Insuring Agreement that provides coverage "only with respect to liability arising out of the ownership, maintenance or use of that part of the premises leased to you and shown in the Schedule." The forms also include two exclusions, which exclude coverage for

1. any "occurrence" that takes place after you cease to be a tenant in the premises described in the Schedule, and
2. structural alterations, new construction, or demolition operations performed by or for the person or organization designated in the Schedule.

This subchapter reviews the courts' interpretations and applications of the Insuring Agreement and the exclusions in these ISO forms.

I. The ISO Landlord/Tenant Additional Insured Insuring Agreement: Liability Arising out of the Ownership, Maintenance, or Use of the Premises Leased to the Named Insured Tenant

Although "[o]ne of the primary functions of the additional insured endorsement is to protect the additional insured from vicarious liability for acts of the named insured,"² the majority of courts agree that an insurer owes additional insured coverage to a manager, landlord, or lessor when the accident at issue is within the leased premises³ even for the additional insured's liability for its own acts or omissions. The courts do not agree, however, on when an insurer owes additional insured coverage for an accident that occurs off or outside of the leased premises.

If the injury or damage that occurs off the premises arises out of maintenance work for the leased premises, then courts will find that off-premise accidents are within the additional insured coverage even if the accident is the result of a condition for which the additional insured, not the named insured, has responsibility. In Zurich American Insurance Co. v. National Specialty Insurance Co.,⁴ the court found that the insurer owed additional insured coverage for an accident involving a maintenance person for the tenant named insured who was injured when he fell from a ladder he placed on an uneven asphalt surface to access the roof to repair a water leak into the tenant's premises. Similarly, in Maldonado v. Kissm Realty Corp.,⁵ a New York court found the insurer owed additional insured coverage for a suit concerning an injury to a plaintiff sustained while on a roof that was not within the leased premises. The plaintiff was on the roof to perform maintenance on HVAC units that were the named insured tenant's responsibility under its lease. In coming to its decision, the court explained that "the perimeters of coverage afforded under the policy must be viewed not in strictly territorial terms but rather in operational terms covering the extent of control over the premises."⁶

Some insurers have attempted to avoid additional insured coverage for an accident arising from work off the premises by contending the work was repair or renovation, not maintenance. The courts that have considered this issue reject any such interpretation. Instead, they find that the term "maintenance," which is not defined in the policy, is ambiguous and could reasonably be interpreted to include repair or renovation. As a result of this ambiguity, these courts find that even if the accident occurs off site for repair or renovation of the premises, the accident arises out of maintenance as is required for the additional insured coverage.⁷ (As a result of this broad interpretation of the term "maintenance," ISO has added an exclusion for structural alterations, which is discussed further in this chapter, section III.B.)

The more difficult issue for the courts is when an insurer owes additional insured coverage for off-premise accidents arising out of use of the leased premises. Logic and the intent of additional insured coverage for vicarious liability would seem to dictate that the coverage for these off-premise accidents is dependent upon who is in control of the accident location and responsible for the condition that caused the accident. However, the courts are constrained to look beyond logic and to the wording of the additional insured endorsement and particularly to how "arising out of" is to be interpreted.⁸ As a result, there is no uniform approach to when an off-premise accident arises out of the use of the premises. Instead, the courts take many different approaches in lockstep to how they interpret "arising out of." As a Massachusetts court commented several years ago, "Looking to court decisions in other states provides little guidance, since these courts are divided. Some find that the policy language unambiguously excludes from coverage any claim arising out of conduct that occurred outside the leased premises. . . . Others have found this language to provide coverage when there is a substantial nexus between the occurrence and the use of the leased premises, so that the occurrence was a natural and reasonable incident or consequence of the use of the leased premises."⁹

Some states read the Insuring Agreement literally and confine the coverage to only accidents arising on the leased premises. See Gillis v. Demarkles, in which the plaintiff, a customer of the tenant, fell on a sidewalk to the parking lot of a shopping center where the tenant leased a store location. The court found that the landlord's liability did not arise out of the "use" of the leased premises because

[t]his clear language, reasonably interpreted, limits [the insurer's] coverage of [the landlord] to occurrences that took place on the leased premises. Any other interpretation is either unreasonably broad, arbitrary, or ambiguous. If, as [the landlord] contends, this provision gives coverage to accidents that occur outside the leased premises as long as the accident arose out of the business use of the premises, then there is no geographic limit to this provision; the insurer would just as surely be liable for a customer's fall that occurred at the far end of the parking lot, or across the street near her parked car, or on her way home. If one were to attempt to avoid this overbreadth by setting geographic limits, one would need either to be arbitrary (the common area outside the store) or ambiguous (the area immediately outside the front door).¹⁰

In addition to the reasonable interpretation of the wording, the court in Gillis also considered other factors, including the premium charged for the policy, the existence of the landlord's own insurance policy, and the reasonable expectations of the parties. The court also noted that

an objectively reasonable insured would reasonably have understood that there were sound business reasons for the Endorsement to limit coverage for the landlord to acts occurring within the leased premises, and reasonably would have understood the language of that Endorsement to fulfill those business reasons. It makes good sense, especially in the context of a shopping center, for there to be clear lines as to who is insuring what risk, so that all foreseeable risks are covered by insurance and premiums are not needlessly increased by redundant coverage. It also makes good sense for the entity responsible for the maintenance of a property also to be responsible for insuring against risks resulting from the absence of proper maintenance on that property. It is not surprising that [the landlord] and [the tenant] followed these basic principles in allocating insurance for the shopping center: [the landlord] maintained and insured the common areas, [the tenant] maintained and separately insured its own leased premises, and [the landlord] required [the tenant] to add it as an additional insured on its Policy to guard against vicarious liability, which [the tenant] could do at no additional cost. These clear lines are lost if one interprets the Additional Insured Endorsement to cover risks beyond the geographic scope of the leased premises. Such an interpretation would mean either that [the landlord] and [the tenant] both purchased insurance to cover some of the same risk. . . . In short, clear lines of insurance coverage make good business sense and only one interpretation permits these lines to be drawn clearly. Both of these businesses reasonably should have understood that.¹¹

Many states will find that an accident that occurs off the leased premises is not within the additional insured Insuring Agreement if the property is a multi-tenant location, such as a mall. In Holmes v. Kimco Realty Corp.,¹² the court found that the owner of a multi-tenant location was not entitled to coverage for the parking lot slip and fall of a customer of Lowe's, one of the tenants that used the parking lot. The court provides a well-reasoned, albeit lengthy, explanation for the lack of coverage in multi-tenant locations. According to the court:

While a Lowe's customer will undoubtedly park as close as possible to that store, he could park anywhere in the lot. There is not one "defined route" from the lot to the store. Therefore, while a reasonable invitee to the Shopping Center would expect safe passage from the parking lot to any of the stores benefiting from the lot, the invitee would not reasonably expect one tenant to be responsible for maintaining the entire lot. . . . While . . . Lowe's and the other

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