Insurance Coverage Gaps in Commercial Space Rental Agreements Tenant vs landlord responsibilities for fire, theft, and business interruption

Insurance coverage gaps in commercial space rental agreements arise from the assumption of one party that "the other side" has taken care of fire, theft, and business interruption; however, the policies tend to be narrow, poorly coordinated, or simply not read. Landlords are inclined to insure the building while tenants insure contents and operations; however, many perils-in-particular business interruption-awkwardly sit between both parties and are not thus clearly allocated within the lease. Standard property policies may also omit some key causes of loss, such as certain natural hazards or utility failures, unless specific endorsements are taken; a point both parties may discover at claim time, to their dismay, as the expected protection was missing. Once one of the hazards-defined-simple fire, burglary, or prolonged outages-takes place, since the lease does not expressly state the assignment of responsibilities/obligations and the responsibilities for minimum coverage levels, disputes start as to who should have insured what.

Insurance in commercial rental space agreements revolves around a handful of critical categories of insurances which should be defined and aligned between landlord and tenant. The property or building insurance protects the structure, core services, and possibly landlord fixtures from risks such as fire, flood, and storm. Contents insurance protects the movable assets, such as furniture, IT equipment, stock, and documents, usually protected by the liability of the tenant. Liability insurance covers claims against third parties for bodily injury or property damage happening at the premises, and business interruption insurance covers the loss of income and ongoing expenses when an operation is disrupted by an insured event. The lease clauses should specify the party responsible for each type, the minimum limits required, and how the policies shall interact with one another-e.g., requiring specific parties to be named as additional insureds or loss payees.

Fire being the most important risk in any commercial building, the majority of property policies in India are built on the Standard Fire and Special Perils policy. Hence, the normal practice is for the landlord to underwrite the shell of the building, meaning that it usually covers the structure, common areas, and base-building MEP systems, by this policy or by a more general commercial property policy itself. Most landlords also add a loss of rent so that if the building is rendered unlettable by fire damage, they get rental income for a specified indemnity period to meet loan EMIs and operating costs. This policy would normally be in the name of the landlord as the one having insurable interest in the building, and the premium is increasingly recovered from the tenants through the CAM or a separate charge.

The insurance issues regarding tenant contents or fit-outs against fire and similar perils are otherwise the responsibility of the tenants. These typically include workstations, partitions, cablings, interiors of conference rooms, signage, and special equipment with which the tenant has fitted out the premises. The tenants are also expected to keep their public or commercial general liability cover so that should a fire arise out of their negligence, their policy can respond to third-party claims, including the claims of other occupants or the landlord. Some leases go even further and go as far as requiring the tenants to contribute to the landlord's deductible if a fire originated from their unit or name the landlord as an additional insured for certain liabilities related to the demised premises.

Fire-related exclusions may leave tenants guessing as to what exactly belongs to the landlord or tenant and who is responsible for insuring the different layers of interior work. The landlord's policy may provide coverage for the building shell but not for costly tenant improvements and custom fit-outs that tenants believe may be automatically covered. Tenants may be intending only on purchasing contents insurance and perhaps not including business interruption riders, which would leave them vulnerable for cash flow during a post-fire shutdown while hardware and furniture are being replaced. A well-drafted lease will clarify the ownership of fit-out works during the lease term and indicate parameters for insuring them and notional replacement values, the last usually being documented in an annex.

Losses from theft or burglary usually deal with temporary movable assets lying within an empty space. The commercial property policy of a landlord may extend coverage to the building shell, doors, windows, and landlord's fixtures on loss by burglary or attempted theft, thereby allowing for repairs to common infrastructure after a break-in. A few combined fire and burglary policies exist for small or medium commercials, mostly to protect the physical investment of an owner rather than property belonging to tenants. The landlord's policy generally would not provide protection for a tenant's stock, laptops, and so forth, even if triggered by a break-in that damaged common property.

It is therefore important for tenants to procure theft and burglary coverage for their own contents and business premise-with additions like office equipment, inventory, tools, and any other assets standing in the premises-money and precious items inside if the business is dealing with cash handling or high-value physical items. Many property products in the Indian market explicitly recommend that in addition to fire cover, burglary cover be taken to protect against theft of contents, rather than just assume that it is enough to simply get a pure fire policy. These income gaps mostly arise when tenants assume that the landlord's insurance for building extends coverage for their inventory or when the limit set out for special items on the policy is considerably less than the monetary value of those items. It should be minimised in the lease wording that the tenant must have adequate burglary and theft coverage for their stocks, and should clear the doubt that they are relying on the landlord for this risk under the landlord's building insurance.

Business interruption constitutes a particularly sensitive area because an insured event affects the finances of both landlords and tenants in different and often adverse manners. In other words, the landlord will potentially suffer loss of rental income while the premises are unfit for occupation, and on the other hand, the tenant will suffer loss of revenue and running fixed costs while in fact holding property insurance for the physical damage. The loss of rent is often added to the property policy of the landlord so that for an agreed amount of rent for a limited period after an insured peril-for example, fire-it is paid in the event that repairs to the premises are being made and the tenant does not satisfy his obligations to pay rent.

Tenants may take out business interruption insurance, also referred to as business income insurance or insurance for fire loss of profit, as an extension of their property policy. Such insurance comes into effect where, as a result of damage covered by the insurance, physical and economic loss tolerances will have to be set for interruption of all, or part, of the policyholder's operations: the loss represents gross profit not earned, fixed overheads incurred, and somewhat rent commitments not yet discharged during the business recovery period. Business interruption policies generally also cover certain expenses incurred to sustain business operations, such as leasing temporary office space, outsourcing business operations, or overtime to restore operations in a timely way. New commercial leases now contain explicit encouragement or demand tenants to take out business interruption coverage to limit the possibility of violations of rent obligations, therefore ensuring the overall stability of the building.

Common coverage gaps occur around business interruption when tenants either fail to take out any BI cover or tend to underestimate the actual time that would realistically be involved in the recovery from any given major incident. A great number of tenants think that if they are not able to perform their duties, the landlord would act out of goodwill and grant a waiver of rent, when in fact, when the lease may be calling for a continuance of payment even during closure. BI policies covering physical damage at the premises may also not cover disruptions in the real environment, such as extended utility outages, a breakdown of suppliers, or restricted access to the building, without the necessary specific extensions. For this reason, any activity on BI triggers, sub-limits, and indemnity periods will need to be paid careful attention to by tenants, while for landlords the guarantee will include relevant provisions concerning realistically anticipated repair timelines and the extent of cover available within the market.

Login Realty helps tenants and landlords navigate insurance coverage gaps in commercial space rental agreements by integrating risk allocation into the leasing process from the start. Their team reviews standard lease templates to flag ambiguities around fire, theft, and business interruption responsibilities, recommending clear clauses on minimum limits, proof-of-cover requirements, and mutual waivers of subrogation that align with Indian market policies like SFSP and BI extensions. For Bangalore’s office, warehouse, and mixed-use properties, Login Realty curates options where building insurance details are already disclosed, connects parties with insurance brokers for tailored contents and liability covers, and ensures indemnity periods match realistic recovery timelines, reducing disputes and accelerating deals. This proactive approach lets businesses focus on operations while minimising financial exposure from uninsurable gaps or claim rejections.​

Frequently Asked Questions (FAQs)

1. Who insures the building structure against fire in a commercial lease?

   Landlords typically insure the building shell, common areas, and base MEP under a fire and special perils policy, often passing premiums to tenants via CAM.​

   
   

2. Does the landlord’s insurance cover tenant contents like furniture or stock?

   No, landlord policies usually exclude tenant-owned contents; tenants must arrange their own contents insurance for assets inside the premises.​

   
   

3. What is business interruption insurance, and who needs it?

   Business interruption (BI) covers lost income and fixed costs after an insured peril halts operations; tenants typically buy it to protect revenue, while landlords may have loss-of-rent cover.​

   
   

4. Should tenants insure against theft in commercial spaces?

   Yes, tenants are responsible for burglary and theft cover on their contents, stock, and valuables, as landlord policies focus on building damage only.​

   
   

5. What happens to rent payments after a fire or major loss?

   Tenants remain liable unless the lease specifies abatement; landlord loss-of-rent insurance protects their income, but tenants need BI to cover ongoing obligations.​

   
   

6. Can leases require tenants to name landlords as additional insureds?

   Yes, many leases mandate tenants add landlords to their liability or property policies as additional insureds or loss payees to streamline claims.​

   
   

7. What are common insurance gaps in commercial leases?

   Gaps include unclear fit-out ownership, inadequate BI indemnity periods, and no minimum limits, leading to disputes over who covers improvements or downtime.​

   
   

8. Does GST apply to insurance premiums in commercial rentals?

   Yes, 18% GST applies to most property and liability premiums; tenants can often claim input tax credit if eligible under GST rules.​

   
   

9. How long should a business interruption indemnity period be?

   12-24 months is realistic for major losses covering demolition, rebuild, and reoccupation, rather than short 3-6 month defaults.​

   
   

10. How does Login Realty help with insurance in leases?

    Login Realty flags gaps in drafts, curates compliant properties, and connects with brokers for tailored covers, ensuring clear fire, theft, and BI allocations.​