As a landlord or property manager, your time is valuable. Spending it tracking down and verifying tenant certificates of insurance (COIs) for each unit might seem like a waste. After all, doesn’t everyone have insurance? The short answer is no, and not paying proper attention to COIs can lead to much bigger problems down the road.
Here, we’ll explain why requiring tenant certificates of insurance is a must, and how to set up a strong system that makes it easy to track down the information you need. Even more importantly, we’ll share the risks that come for you as the owner when you don’t properly manage your tenant COIs.
Purpose of Tenant Certificates of Insurance (COIs)
In short, certificates of insurance (COIs) in commercial real estate are essential to safeguard your assets, ensure compliance, and reduce financial risk. This vital document is provided by your tenants to prove that they have valid insurance for the part of your property that they lease. Insurance types might include coverage for fire, injury, damages, and other unpredictable events that would otherwise cost the tenant or you as the owner a large sum of money. Therefore, ensuring that your tenants have correct, current insurance policies is incredibly important, since it helps protect all parties in the event of disaster and makes it very clear who is responsible for what.
Lease Compliance & Risk Transfer
The main purpose of insurance is to create risk transfer. That is, paying a premium to an insurance company or risk-sharing pool in order to shift certain risks away from you as the insured. While this is crucial to proper risk management to protect against critical, catastrophic, and potentially bankrupting events, it is not the only consideration with holistic risk management. Risk avoidance, risk reduction, and risk retention are key strategies as well.
One of the benefits of tracking tenant COIs is to better understand your risk and be sure that you are protected. However, proper certificate gathering and approval are required to reduce the risk of tenants not complying with the lease agreement regarding their insurance coverage. It’s important to require a COI as part of your lease agreements, and then to make sure you can verify and track these documents. Property management platforms designed for commercial real estate like STRATAFOLIO can help you keep this information organized and close at hand, preventing you from losing crucial insurance details.
Liability Coverage & Additional Insured Status
Lease agreements with proper legal language are a way to transfer risk away from the landlord contractually. Plus, it provides additional insured status to a tenant’s policy. Additional insured status means that if litigation is brought against the landlord due to the tenant’s operations, the landlord is also protected under the policy. Lease agreements frequently require tenants to insure the property they are occupying as a contractual risk transfer tool.
Managing COIs: Tracking, Renewal & Automation
While somewhat time-consuming, tracking certificates of insurance can have a massive impact on future events and claims that could arise. Using products to track COIs such as STRATAFOLIO that provide a mechanism for monitoring COIs helps reduce your risk.
For example, in STRATAFOLIO, tenants can upload and store their COIs directly through a tenant portal, meaning that both tenants and owners always have access to this important document. STRATAFOLIO also allows owners to add specific insurance requirements to a tenant’s lease, making it easy to see if each requirement is fulfilled, missing, or expired. Set up alerts for immediate notification if there are any problems with insurance requirements.
Best Practices & Legal Considerations
Another consideration for landlords is their own insurance contract. The policy may require a tenant certificate of insurance verification. As insurance advisors, we often see landlords only begin to focus on this when their own insurance company takes some action related to certificate gathering noncompliance. This include but are not limited to:
- Charging an additional premium for noncompliance
- Increasing renewal rates for noncompliance
- Denying claims based on noncompliance
When a landlord is going through their insurance underwriting process, one of the common questions asked of the landlord are their requirements around tenant policies. Specifically, insurers want to know the types and limits of insurance and proof of coverage. If a landlord states they track this for insurance approval and does not, it could lead to a discussion around material misrepresentation. Ultimately this could lead to the actions noted above.
The other data elements insurers are primarily looking for are:
- Geographic location and proximity to emergency services, such as the nearest responding fire department
- Rent roll and risk profile of commercial tenants ( i.e. a retail clothing store being less risky than a fireworks retailer/distributor)
- Insurance loss history
- Lease agreements (risk transfer language, minimum limits of insurance, additional insured status, etc)
- Building valuations and updates (roof, hvac, plumbing, etc)
STRATAFOLIO Takes the Stress out of COI Management
These are just a couple of the reasons to have an emphasis on the COI process. While important, we recognize this can be cumbersome, overwhelming, and confusing. Fortunately for those who feel this way, tools, resources, and software are available to help in this process. We recommend consulting with your current insurance advisor or reaching out to a member of our team to discuss. Please don’t hesitate to reach out and schedule a free demo to start a conversation around this or other risk management and insurance concepts.
