In Florida, the effectiveness of the Lessors Risk-Only Endorsement (LRO) in shifting liability coverage from property owners to commercial tenants has come under scrutiny. This endorsement is designed to modify insurance policies to ensure that tenants carry sufficient liability insurance, thus protecting both the landlord and the tenant.
Understanding the Lessors Risk-Only Endorsement
A typical LRO stipulates that for any classifications under the policy, coverage is based on the condition that tenants maintain liability insurance with limits equal to or greater than the landlord’s policy. Specifically, it mandates that tenants must name the landlord as an Additional Insured on their insurance policy. Furthermore, the tenants’ insurance must cover areas owned by the landlord but leased to the tenants. Should tenants fail to meet these requirements, coverage under the policy becomes null and void.
According to Florida law, an insurer may deny coverage if the insured breaches any policy provision that would otherwise allow for coverage. The LRO’s stipulations can be considered conditions precedent, meaning they must be fulfilled before the policy can take effect. If the conditions are not met, the commercial general liability coverage may not apply.
The Implications of Tenancy and Coverage
In Florida, commercial tenancies are regulated under Florida Statutes, specifically Chapter 83, which outlines the requirements for a valid lease agreement. A commercial tenancy exists when a lease transfers the right to possess and use property in exchange for rent. Thus, if there is no written or verbal agreement stipulating rent, the occupant may not qualify as a tenant, raising questions about the applicability of the LRO.
If the LRO cannot be enforced against an occupant without a tenancy agreement, landlords must consider whether the LRO effectively shifts coverage to tenants with valid leases. Florida law establishes that the priority of coverage in competing policies is determined by their “Other insurance” provisions. These provisions can vary significantly, outlining how losses are shared among insurers.
There are three primary types of “Other insurance” clauses: pro rata clauses, which distribute losses proportionately; excess clauses, which designate one policy as secondary; and escape clauses, which void the policy if other insurance exists. Under Florida law, if multiple policies contain excess clauses, they may cancel each other out, compelling each insurer to share the loss equally based on policy limits. Consequently, even with compliance to the LRO, landlords may find that the intended risk shift to tenants does not occur.
Insurers operating in Florida should carefully evaluate these risks associated with LROs. The complex interplay between tenant insurance requirements and policy provisions could lead to significant coverage gaps, impacting both landlords and tenants.
In conclusion, while the Lessors Risk-Only Endorsement aims to provide an effective risk management tool for property owners, its practical application in Florida raises critical questions regarding its enforceability and overall effectiveness. As such, all stakeholders must navigate these intricacies with caution to ensure adequate insurance coverage and protection.
