Operator guide

Insurance through a build-out: what to handle, and when

Have your insurance agent read the lease before you sign it.

The lease sets what coverage you must carry, at what limits, and who else has to be named on your policies. You pay for those terms every year of the lease. They can be changed before you sign and not after, and very few tenants have an agent look first.

Once the lease is signed, coverage gets added as the project moves: you take possession, the contractor starts, equipment is delivered, the first employee goes on payroll, the contractor hands the space over. Each is a date already on your calendar with an insurance step attached to it. This guide goes through them in order.

1 · What the agent is looking for in the lease

The insurance terms are sometimes gathered in an exhibit at the back. More often they are spread through the body of the lease — a limit in one clause, a named party in another, an endorsement requirement somewhere else. The agent is reading the whole document for six things.

• The umbrella limit. Landlords ask for $5 million; many accept $3 million and some $2 million. Past $3 million a tenant with real alcohol sales usually needs a second carrier, so the last two million cost more than the first three.
• Who has to be named. Landlords, lenders and property managers are listed as additional insureds on the liability policy. Routine; the agent handles it.
• The mutual waiver of subrogation. Most leases include one: each side agrees its insurer will not pursue the other after a claim. On the property policy the lease language is enough if agreed before a loss; on the liability policy the carrier adds a routine endorsement. The agent confirms both.
• What the tenant insures. The landlord covers the building; what the tenant takes over or installs is usually the tenant's from the day of possession. If the lease puts any on the landlord, the landlord's policy has to say so.
• Whether the required coverage can actually be bought in that state, for that use, at a workable price. A tenant who cannot place what the lease requires is in default from the day of signature.
• What the landlord owes in return. The lease spells out the tenant's obligations in detail. It should also commit the landlord to carry the building insurance and to the same mutual waiver. If it does not, ask.

2 · Taking possession

Possession is the date the landlord turns the space over to the tenant, usually before rent starts and before any construction. Most leases require a certificate of insurance before the keys change hands. From that day the space is the tenant's responsibility, whether or not anything is happening in it.

• General liability starts on the possession date. Someone trips on the patio in the first week and it is the tenant's claim, not the landlord's. The premium on a space that is not open yet is small.
• In a second- or third-generation space, the existing improvements are the tenant's from possession. Whatever fixtures, equipment and improvements the tenant plans to keep using; in a restaurant, the hood and the walk-in. Price what stays at replacement cost and put the list on the property policy that day.
• In a flood zone or earthquake territory, that coverage starts now. Standard policies exclude both, so it is added to the tenant's property policy now, to builder's risk for the build, and confirmed again at the handover. A lender will require flood coverage in a mapped zone.

The named insured on every policy has to match the tenant entity in the lease exactly, checked against the formation documents, not the declarations page. New locations are usually a new entity formed the same month, and a name carried over from the last site causes no trouble at all until there is a claim.

3 · Before the contractor mobilizes

Once a contractor is on site, the leverage to ask for any of this is gone. Before work starts: certificates for the contractor's general liability, workers compensation, auto and umbrella, with the limits read, and builder's risk on the work.

The contractor's own policies.

• Be named on the contractor's liability policy, by form number. CG 20 10 covers the tenant while the work is done; CG 20 37 covers claims that come after it is finished, which is most of them. The landlord has to be on it too, and the usual forms only reach parties the contractor signed with, so the contract calls for CG 20 38.
• Two terms for the construction contract. A per-project liability limit, since completed-work claims share one annual limit across jobs; and coverage kept in force for a period after completion, or it ends at the contractor's renewal.
• Ask who is actually covered on site. A certificate for each sub, since many policies cut back for work done by uninsured subs. And whether an owner-operator contractor is excluded from the company's own workers compensation: common and legal for a sole proprietor, and it can leave nobody covered.
• If the contractor is also designing, ask about professional liability. General liability excludes design work, so on a design-build job the design half is not covered.

Builder's risk.

Builder's risk covers the work while it is being built. The lease usually says the tenant maintains it; the construction contract often puts it on the contractor. One policy can satisfy both. Put the two documents side by side, settle whose policy it is before the crew mobilizes, and confirm four things on it.

• The tenant is a named insured, not "an insured." On many forms the delay coverage pays only the named insured, and a certificate does not change that. Ask for the declarations page showing the tenant's name.
• Delay coverage, if a fire or a flood mid-build pushes the opening. Builder's risk pays to repair the work. The rent and loan interest that keep running through the extra months are covered only if this is added, and on a contractor's policy it usually is not. Ask for it, payable to the tenant.
• The insured value is the construction contract, on a fit-out form. Ground-up forms treat a space inside an occupied building differently.
• Builder's risk excludes flood and earthquake. In a flood zone or earthquake territory, add them to it for the construction period.

4 · During construction

• The property limit steps up ahead of the deliveries, not item by item. The furniture, fixtures and equipment (FF&E) are the tenant's to insure, not builder's risk. The budget and the delivery dates are known, so the limit rises in stages with the agent, in halves or thirds, whichever matches the schedule.
• Delivered equipment is the tenant's from the day it lands. Theft or damage on site is the tenant's property policy, which is why the limit steps up early. A hood or a walk-in waiting to be built in is building material until attached, and theft of unattached material is often limited: ask how it is covered until installed.

5 · The handover

Handover is a period, not a day. The contractor turns the space over at substantial completion, the punch list runs on after it, a temporary certificate of occupancy may come before the final one, and the first night of service can fall anywhere in that stretch. The insurance has to follow the sequence, not a single date.

• Set the date with a certificate of substantial completion. The standard form (AIA G704) names the day, assigns insurance and damage to the work to the tenant from that day, and attaches the punch list with a deadline. The property policy goes to full value on that date.
• Full value is what the finished space cost to build plus the equipment, at replacement cost, with flood or earthquake added again if needed. Confirm the changeover date in writing with both carriers.
• Used before that date, or punch list running past it: keep builder's risk alive in writing. Standard builder's risk ends 60 days after occupancy or first use, and a friends-and-family night or a temporary CO counts. An occupancy endorsement or the carrier's written consent carries it to final completion.
• The contractor's liability does not end at handover. While the crew finishes the punch list, the contractor's policy covers the tenant as ongoing work; after that, the completed-work coverage from section 3 applies for as long as the contract requires. The punch list itself is enforced by retainage, not insurance.
• Code upgrades are not automatically covered. Standard property coverage rebuilds what was there, not to today's code. After a large loss the whole space usually has to be brought to current code, and where the lease puts the improvements on the tenant, so is that cost. Ordinance or law coverage pays it.

6 · The first hire: the people policies

Three coverages follow people, not the opening date, and they start the day the first person is paid through the new entity's payroll.

• Workers compensation pays for injuries on the job. In most states it is a carrier policy, in the same package as the rest. Four states sell it themselves, and there the piece that defends employee lawsuits, called stop gap, goes on the liability policy.
• A ramping payroll does not need a ramping policy. The premium runs on a twelve-month payroll estimate, two managers for three months and a full crew after, and is trued up at audit. A group adds the new entity to its existing policy.
• Employment practices coverage is a separate policy for claims about how people were treated: discrimination, harassment, wrongful firing. Buy it before the first interview, since a claim can come from someone not hired, and never let it lapse; it covers claims by the date they are filed.
• Ask for two additions to it, neither standard: wage and hour claims (overtime, off-the-clock and, in restaurants, tip credit; capped, and often defense only) and claims by customers or vendors alleging harassment by staff.
• Driving for the business starts before opening. Supply runs, bank deposits, equipment pickups and delivery are business use, which a personal auto policy generally excludes. Hired and non-owned auto goes on the business policy.

7 · Before the first customer

The liability program goes to the limits the lease set: general liability, the umbrella and, for a restaurant or bar, liquor, more or less than the operator would otherwise buy. The landlord's certificate goes out before opening. The property program goes to what the finished business needs.

For a restaurant or bar: liquor liability.

• It is a separate policy. General liability excludes claims that come from serving alcohol. This is the policy that pays when an over-served guest hurts someone in a car, is hurt themselves, or hurts someone in a fight; the state's dram-shop law decides how far that reaches.
• In force before the first drink is poured: staff training service, the friends-and-family night, the soft opening.
• At the limit the lease requires, with the umbrella sitting over it. Umbrellas do not cover liquor unless it is scheduled.
• Bar-forward concepts: ask what it pays for a fight or an ejection. Those are the claims bars actually see, and many liquor policies cap or exclude them.

The property side.

• Check the lost-income coverage before opening. It has been on the property policy since possession. A business owner's policy usually pays the actual loss for up to twelve months; a package policy carries a stated limit, and that limit should come from the pro forma, rent and payroll included.
• Two choices on it are worth a conversation. How long it keeps paying after you reopen while sales climb back, since the standard period is short and extending it costs little; and whether hourly wages are paid through the closure, so the team is still there when the doors open again.
• Equipment breakdown is worth a look, not a given. Standard property coverage excludes mechanical failure; new equipment carries warranties, so this matters more as they run out. For a restaurant: the compressor and the walk-in.

8 · Operating: what keeps the premium down

The policy is bound. From here the price is set in the building: workers compensation is rated on three years of claims, and the rest of the package is repriced every year on the claims record. The habits below prevent claims, defend the ones that happen, and keep the renewal cost down.

Fire, if there is a kitchen.

• The sprinklers and the hood suppression system are a condition of the property policy. Kept in working order, serviced and inspected on the schedule the local code and the carrier set, with the signed records kept.
• Most restaurant fires are grease. Filters cleaned nightly, the hood and duct cleaned by a certified company on schedule, the area around the fryers kept clean, and the cleaning logged.

When someone is hurt or gets sick.

• A written plan for a guest: an incident form, photos, witness names, the camera footage saved, and the carrier told within a day.
• A written plan for an employee: reported the same day, a clinic chosen in advance, and light duty as soon as a doctor allows. Return-to-work is the biggest lever on what a comp claim costs.

Training and maintenance.

• For a restaurant or bar, alcohol service certification for everyone who pours. The state, the municipality or the distributor usually runs the class.
• For a kitchen, food handling and safety certification. The health department and the food purveyors often run those.
• A written harassment policy, with training for managers.
• Service contracts for the equipment: heating and cooling, refrigeration and the cooking line serviced and cleaned on a schedule, records kept.
• Floor and restroom checks logged by shift, ice and snow logged. A logged floor check defends a slip and fall.

The whole sequence, by trigger

Dates on the project calendar, and the insurance step each sets off.

From the blog

• Who buys builder's risk on a restaurant build-out?
• Is a new LLC covered by my restaurant's policy?
• Is my restaurant's property limit still enough?
• What is a good experience mod for a restaurant?