Leasehold insurance covers losses inherited by the lessee of a leasehold property in the event the lease is canceled due to some type of disaster rending the property unlivable or unusable. Landlords will usually take out insurance to cover the property itself and to protect their investment in the property, but this insurance does not cover the lessee under normal circumstances. In the event of a disaster, if the lessee does not have leasehold insurance, he or she risks losing any and all possessions or investment in the leasehold property. Some leases may actually require the lessee to secure leasehold insurance, especially if the property is located in an area prone to natural disasters, such as near the coastline where hurricanes or typhoons strike often.
Leases are typically termed as a contract between a landlord and a lessee. This effectively transfers conditional ownership of a property from the landlord to the lessee for a specified amount of time, usually termed as a long tenancy with periods of either 99 or 125 years. Coverage of the lease itself usually includes everything within the four walls of the unit like possessions and any renovations done by the lessee. As such, leasehold insurance is meant to cover this specified term along with possessions and investments within the four walls of the property. Landlords will usually cover the outside of the building and common area with their own policy.
Typical leaseholds are flats, housing units, shop houses or units located above commercial or retail space. While a lessee does have a great deal of flexibility with the unit, he or she is still under contract with the landlord and has to abide by the terms of the contract. One such term is for the lessee to secure leasehold insurance, often required by the landlord to protect his or her interests, in addition to the interests of the lessee.
Under such requirements, the lessee is normally obligated to secure a policy from an insurer nominated or approved by the landlord. The authorized insurer must be the lessee for a leasehold insurance policy, while the policy must cover both the interests of the lessee and the landlord. Coverage must be for the entire term of the lease and must cover all potential risks to the unit. Failure to secure and maintain leasehold insurance violates the lease under such circumstances and may cause forfeiture of the lessee’s rights to the property. Courts usually serve as the final adjudicator in such matters, though the lease is often considered the primary source of evidence for such rulings aside from mitigating circumstances caused directly by the landlord.