Insurance Pass-Through
Provisions governing how property insurance premiums are allocated to tenants, including coverage scope, carrier selection, and premium increase limitations.
Model Lease Language Variations
“Operating Expenses shall include all insurance premiums for insurance carried by Landlord with respect to the Building and the Land, including property, liability, umbrella, earthquake, flood, terrorism, environmental, and any other coverage Landlord deems necessary or advisable. Landlord shall determine the appropriate coverage types and limits in its sole discretion.”
Broad discretion on coverage types and limits. Includes optional coverages (earthquake, terrorism) at landlord's sole election. No market-rate limitation.
“Operating Expenses shall include premiums for commercially reasonable insurance covering the Building, including property (replacement value), commercial general liability ($5M per occurrence), and such other coverages as are customarily carried by owners of comparable buildings in the metropolitan area. If the premium increases by more than fifteen percent (15%) in any year, Landlord shall obtain competitive quotes from at least two (2) carriers.”
Market-based coverage standard. Competitive bidding requirement on large increases. Specific limit for liability. Prevents gold-plating.
“Insurance included in Operating Expenses shall be limited to: (i) property insurance at replacement value, (ii) commercial general liability ($5M per occurrence), and (iii) umbrella coverage ($10M). Premium increases exceeding ten percent (10%) per year shall be excluded from Operating Expenses to the extent exceeding such threshold. Earthquake, flood, and terrorism insurance shall not be included absent written consent of tenants occupying more than fifty percent (50%) of the Building.”
Enumerated coverage types only. Premium increase cap at 10%. Optional coverages require majority tenant consent. Maximum protection against premium volatility.
Calculation Methodology
1. Compile all insurance premiums paid by Landlord for the Building. 2. Verify each policy type falls within the lease's permitted coverage scope. 3. If premium increase exceeds lease threshold, cap at the permitted amount. 4. Net out any insurance proceeds received for the coverage year. 5. Allocate premiums to tenants per their proportionate share. 6. For base year leases, pass through only the increase above base year premiums.
Common Drafting Errors
Not enumerating permitted coverage types — allows landlord to add exotic coverages (cyber, pollution) at tenant's expense
Failing to require competitive bidding — landlord may use an affiliated broker with above-market premiums
Not addressing terrorism (TRIA) insurance — post-9/11, this can be a significant cost that should be explicitly included or excluded
Omitting treatment of insurance deductibles — a high deductible reduces premiums but shifts risk to the self-insured retention, which may be billed as a loss expense
Relevant Case Law
Landlord added terrorism insurance post-lease signing and passed through the $180K premium as an operating expense. Court held the lease's insurance provision was broad enough to include TRIA coverage, as it permitted 'such other coverages as are customary.'
Billing System Implications (Yardi / MRI)
In Yardi, insurance premiums are assigned to a GL code within the operating expense recovery pool. Common error: including the full annual premium in the month it's paid rather than spreading it across 12 months — creates timing mismatches in monthly estimates. In MRI, insurance is typically a manual entry in the Recovery Analysis — verify that premium allocation matches the policy period, not the payment date.
CapVeri Analysis
Insurance premiums have increased significantly since 2020, with many markets seeing 20-50% annual increases. This has made insurance pass-through provisions much more contentious. CapVeri benchmarks insurance premiums per SF against market data to flag above-market charges.
Related Resources
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