Are Lessors Risk-Only Endorsements Effective In Florida?

This article addresses the purpose and effectiveness of a Lessors Risk-Only Endorsement (LRO), which is designed to shift coverage from a commercial premises owner to its commercial tenants.

Standard LRO Language
A typical LRO provides as follows:

This language imposes the following requirements in order to trigger coverage under the policy: (1) the leases between the insured and its tenants must require that the tenants name the insured as an additional insured on their policies, (2) the tenants' policies must have limits greater than or equal to the insured's limits, and (3) the tenants must actually purchase insurance that names the additional insured on their policies.

Under Florida law, an insurer may deny coverage where an insured "breaches policy provisions under which, but for the breach, coverage would otherwise exist."¹ Such policy provisions are known as conditions precedent and conditions subsequent.

A condition precedent is one that is to be performed before the contract becomes effective.² The requirement to timely notify an insurer of a claim is generally held to be a condition precedent. A condition subsequent is a condition that provides "that a policy shall become void or its operation defeated or suspended, or the insurer relieved wholly or partially from liability upon the happening of some event, or the doing or omission to do some act. ..."³ The requirement to cooperate in the insurer's investigation of a claim is generally held to be a condition subsequent.⁴

Applying this Florida framework, the requirements in the LRO should be considered conditions precedent to trigger coverage. Thus, where the conditions precedent in the LRO are not met, the policy's commercial general liability coverage should not be triggered. This, however, raises the question of whether the LRO applies where there is no tenancy.

Tenancy
Under Florida law, commercial tenancies are governed by Florida Statutes, Chapter 83, Part I, and commercial relations are governed by Florida Statutes, Chapter 680, section 83.01, which address commercial tenancies as follows:

Pursuant to section 680.1031(1)(q), the term "lessor" means "a person who transfers the right to possession and use of goods under a lease."

Considering these statutory provisions in conjunction with one another, a commercial tenancy exists only where there is a lease (written or at will) that transfers the right of possession of the property from the owner to the occupant in exchange for the payment of rent. Therefore, to establish the existence of a tenancy, the threshold issue is whether there is an agreement between the owner and the entity in possession of a commercial space under which the entity in possession pays rent for the right to possess the space. If there is no exchange of rent, then there is no tenancy. Thus, in situations where there is no agreement between the insured and the occupant that the insured is to receive payment of rent in exchange for possession of the insured premises, the entity in possession of the space may not qualify as a tenant. To the extent no tenancy exists, the LRO may not apply to that occupant.

Priority of Coverage
If the LRO cannot be enforced against an occupant of the insured premises, but can be enforced against a tenant, the next question is whether the LRO actually shifts coverage to the tenant. Under Florida law, priority of coverage is dependent on analysis of the "Other insurance" provisions in all competing policies.⁵

"There are three types of other insurance clauses⁶:

• Pro rata or proportionate recovery clauses. A "pro rata other insurance" clause is described as "a provision to the effect that in the event of other insurance, the loss shall be borne pro-rata dependent upon monetary limits of coverage."⁷
• Excess insurance clauses. An "excess other insurance" clause is described as "a provision that the policy shall be excess over any other valid and collectible insurance applicable to the liability" at issue.⁸
• Escape or no liability clauses. An "escape other insurance clause" is "a provision that if there is other valid and collectible insurance the policy shall not apply[.]"⁹

Under Florida law, "where two or more policies that apparently cover the same loss both contain excess 'other insurance' provisions, the clauses are deemed 'mutually repugnant'"¹⁰ and therefore cancel each other out and such that both policies are each "liable for a pro rata share in accordance with their policy limits."¹¹ In other words, even assuming compliance with the LRO, where the policy on which the insured premises owner has been included as an additional insured contains an excess clause and the insured premises owner's policy also contains an excess clause, the two clauses may cancel each other out such that each insurer has a duty to defend the insured on a pro rata share. Consequently, the LRO may not actually serve its purpose of fully shifting the risk to the tenant and its insurer. Insurers should be mindful of these risks when operating in Florida.

Footnotes

1. "Coverage Defenses" and the Claims Administration Statute, 1 LNPG: New Appleman Florida Insurance Law §8.24.

2. State Farm Mut. Auto. Ins. Co. v. Curran, 135 So. 3d 1071, 1078 (Fla. 2014) (quoting 31 FLA. JUR.2D INSURANCE § 2686 (2013)).

3. United States Aviation Great Lakes, Inc. v. Sunray Airline, Inc., 543 So. 2d 1309, FN 5 (Fla. 5th DCA 1989).

4. State Farm Mut. Auto. Ins. Co. v. Curran, 135 So. 3d 1071, 1078 (Fla. 2014) (quoting 31 FLA. JUR.2D INSURANCE § 2686 (2013)).

5. Privilege Underwriters Reciprocal Exch. V. Hanove Ins. Grp., 304 F. Supp. 3d 1300 (S.D. Fla. 2018).

6. Am. Cas. Co. of Reading, Pa. v. Health Care Indem., Inc., 613 F.Supp.2d 1310, 1318 (M.D. Fla. 2009) (citing Sentry Ins. Co. v. Aetna Ins. Co., 450 So. 2d 1233, 1236 (Fla. 2d DCA 1984)).

7. Auto-Owners Ins. Co. v. Palm Beach County, 157 So. 2d 820, 822 (Fla. 2d DCA 1963).

8. Id.

9. Id.

10. Keenan Hopkins Schmidt & Stowell Contractors, Inc. v. Cont'l Cas. Co., 653 F. Supp. 2d 1255, 1263 (M.D. Fla. 2009).

11. Rockhill Ins. Co. v. Northfield Ins. Co., 297 F.Supp.3d 1279 (M.D. Fla. 2017) (citing Keenan, 653 F.Supp.2d at 1263) (internal citations omitted) ("By contrast, where each policy contains an excess 'other insurance' clause, so that giving each policy's clause effect would leave the insured without primary insurance, the clauses are deemed to cancel each other out, and the insurers are required to cover the loss on a pro rata basis.")