It's crucial to understand that these are minimum requirements. In many cases, especially for larger or higher-risk properties, higher limits may be necessary or prudent. Factors influencing the appropriate liability limits include:

• Property size and value
• Number of visitors or tenants
• Type of operations conducted on the premises
• Location and associated litigation risks
• Historical claims data for similar properties

Umbrella or Excess Liability Coverage

In addition to general liability, CMBS lenders often require umbrella or excess liability coverage. This provides an additional layer of protection above the limits of the primary general liability policy.

Umbrella policies typically offer broader coverage than the underlying policy, potentially filling gaps in primary coverage. Excess policies, on the other hand, generally follow the terms of the underlying policy but provide higher limits.

The required limits for umbrella or excess coverage can vary widely, often ranging from $5 million to $25 million or more, depending on the property's characteristics and risk profile. Factors influencing these limits include:

• Total property value
• Potential severity of claims (e.g., a high-rise building might require higher limits due to the potential for more severe accidents)
• Industry standards for similar properties
• Lender's risk assessment and requirements

Additional Insured Requirements

CMBS loan agreements typically require that certain parties be named as additional insureds on the liability policy. This usually includes:

• The CMBS lender
• The loan servicer
• Any other parties with a vested interest in the property, as specified in the loan agreement

Being named as an additional insured extends the policy's protection to these parties, ensuring they're covered in the event of a liability claim related to the property.

It's important to note that the additional insured status should be on a primary and non-contributory basis, meaning the property owner's policy responds first and without seeking contribution from any policies held by the additional insureds.

Specific Coverage Endorsements

Depending on the nature of the property and its uses, CMBS lenders may require specific liability endorsements. Common examples include:

1. Liquor Liability: For properties with bars, restaurants, or event spaces where alcohol is served.
2. Garage Keepers Liability: For properties with valet parking or parking garages.
3. Elevator Liability: Specifically for multi-story buildings with elevators or escalators.
4. Environmental Liability: Particularly for industrial properties or those with potential environmental risks.

These endorsements ensure comprehensive coverage tailored to the specific risks associated with the property's features and operations.

Contractual Liability Considerations

CMBS-financed properties often involve complex contractual relationships, such as leases with tenants or agreements with service providers. The liability insurance policy must account for these relationships through contractual liability coverage.

This coverage protects the insured when they assume the liability of another party through a contract. For example, if a lease agreement requires the property owner to indemnify a tenant for certain types of claims, the contractual liability coverage would respond to such situations.

CMBS lenders typically require that the liability policy include broad form contractual liability coverage to ensure that all necessary contractual obligations are appropriately insured.

Claims-Made vs. Occurrence-Based Policies

When structuring liability insurance for CMBS-financed properties, the choice between claims-made and occurrence-based policies is an important consideration.

• Occurrence-Based Policies: Cover incidents that occur during the policy period, regardless of when the claim is made. These are generally preferred by CMBS lenders due to their long-term protection.
• Claims-Made Policies: Cover claims made during the policy period, regardless of when the incident occurred (subject to a retroactive date). If used, these policies often require tail coverage or an extended reporting period to ensure long-term protection.

CMBS lenders typically prefer occurrence-based policies due to their more straightforward long-term coverage. However, in some cases, claims-made policies may be accepted if structured appropriately with adequate tail coverage or extended reporting periods.

Terrorism Liability Coverage

In the post-9/11 era, terrorism liability coverage has become a standard requirement for many CMBS loans. This coverage protects against liability claims arising from acts of terrorism.

The Terrorism Risk Insurance Act (TRIA) plays a significant role in how this coverage is structured. CMBS lenders often require that the liability policy include terrorism coverage certified under TRIA, ensuring that the property is protected against this specific risk.

Maintaining Compliance and Adapting Coverage

Liability insurance requirements for CMBS-financed properties are not static. They require ongoing attention and periodic adjustments to ensure continued compliance and adequate protection. Key considerations include:

1. Annual Reviews: Regular reviews of coverage limits and terms to ensure they keep pace with changing property values, operations, and risk profiles.
2. Claims Reporting: Prompt reporting of any liability claims or potential claims to both the insurer and the CMBS lender or servicer.
3. Certificate Management: Maintaining up-to-date certificates of insurance and providing these to the lender or loan servicer as required.
4. Adapting to Changes: Adjusting coverage as needed when there are changes to the property, such as renovations, changes in use, or additions of new features or services.

The Role of Professional Guidance

Given the complexities of liability insurance for CMBS-financed properties, professional guidance is invaluable. Janover Insurance Group, with our expertise in commercial real estate insurance and CMBS requirements, can provide critical assistance in:

• Structuring a liability insurance program that meets or exceeds CMBS loan requirements
• Identifying potential gaps in coverage and recommending appropriate solutions
• Navigating the insurance market to find the most cost-effective coverage options
• Ensuring ongoing compliance with loan covenants related to insurance
• Providing support in the event of claims or coverage disputes

Conclusion: A Strategic Approach to CMBS Liability Insurance

Liability insurance for CMBS-financed commercial properties is more than a loan requirement—it's a crucial component of a comprehensive risk management strategy. By understanding the nuances of coverage requirements, policy structures, and ongoing compliance needs, property owners can protect their investments, maintain loan compliance, and position themselves for long-term success in the commercial real estate market.

The key is to view liability insurance not as a burden, but as a strategic tool that supports the overall health and viability of the investment. With the right coverage in place, backed by expert guidance and regular reviews, CMBS borrowers can ensure they're protected against a wide range of potential liability exposures.

In this article:
1. Key Components of CMBS-Compliant Liability Insurance
2. General Liability Coverage
3. Umbrella or Excess Liability Coverage
4. Additional Insured Requirements
5. Specific Coverage Endorsements
6. Contractual Liability Considerations
7. Claims-Made vs. Occurrence-Based Policies
8. Terrorism Liability Coverage
9. Maintaining Compliance and Adapting Coverage
10. The Role of Professional Guidance
11. Conclusion: A Strategic Approach to CMBS Liability Insurance
12. Get Financing

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