If you own a commercial building and lease it to tenants, Lessor's Risk Only (LRO) insurance is a coverage designed specifically for your situation. Unlike a Business Owners Policy designed for an owner-operator, LRO addresses the unique exposures of a landlord who does not conduct business operations in the building.

What Is Lessor's Risk Only Insurance?

Lessor's Risk Only insurance is a commercial insurance product designed for owners of commercial property who lease their buildings to tenants. It combines commercial property coverage with general liability coverage in a single policy, similar in structure to a BOP but tailored to the landlord's role.

LRO is commonly used for:

• Strip malls and retail shopping centers
• Office buildings
• Mixed-use commercial properties
• Standalone commercial buildings leased to a single tenant

What LRO Generally Covers

A standard LRO policy typically includes:

Commercial property coverage — Protects the building structure, including permanently installed fixtures and improvements, against covered perils such as fire, wind, hail, and vandalism. Coverage is generally written on a replacement cost basis, though actual cash value options exist.

General liability coverage — Protects the landlord against claims of bodily injury or property damage arising from the ownership, maintenance, or use of the premises. Common claims include slip-and-fall accidents in common areas, parking lots, and building entrances.

Business income coverage — Reimburses lost rental income if the building becomes uninhabitable due to a covered loss, such as a fire.

Replacement Cost vs. Actual Cash Value

One of the most important decisions when insuring a commercial building is whether to insure on a replacement cost or actual cash value basis.

Replacement cost pays to rebuild or repair the structure at current construction costs, without deducting for depreciation. This is generally the preferred approach for most commercial landlords.

Actual cash value deducts depreciation from the settlement, which can result in a significantly lower payment — particularly for older buildings.

Underinsuring your building can also trigger a coinsurance penalty. Most commercial property policies include a coinsurance clause requiring you to insure the building to a specified percentage of its replacement cost (commonly 80% or 90%). If you insure for less, the insurer may reduce your claim payment proportionally.

Tenant Operations and Liability

LRO policies are designed for landlords who do not conduct business operations in the building. If you perform maintenance, manage the property yourself, or conduct any business activity on the premises, your insurer needs to know — this can affect coverage and eligibility.

Tenant operations are generally the tenant's responsibility to insure. As a landlord, requiring tenants to carry their own general liability and property insurance — and naming you as an additional insured — is a sound risk management practice.

Vacancy Clauses

Commercial property policies typically include vacancy provisions that can limit or suspend certain coverages if a building is vacant for an extended period (often 60 consecutive days). If your building is between tenants or undergoing renovation, notify your insurance agent — a vacancy permit or endorsement may be needed to maintain coverage.

Common Coverage Gaps for Commercial Landlords

• Ordinance or law coverage — If a covered loss triggers a requirement to bring the building up to current building codes, standard property policies may not cover the additional cost. Ordinance or law coverage addresses this gap.
• Flood and earthquake — Standard commercial property policies exclude flood and earthquake. Separate policies or endorsements are available.
• Umbrella or excess liability — For larger properties or higher-value buildings, an umbrella policy provides additional liability limits above the LRO policy.

Frequently Asked Questions

Is LRO the same as a BOP? No. A BOP is designed for owner-operators who conduct business in the building. LRO is designed for landlords who lease the building to tenants and do not operate a business there themselves.

Does LRO cover my tenants' property? No. LRO covers the building and the landlord's liability. Tenants are responsible for insuring their own business personal property and operations.

What happens if my building is vacant between tenants? Vacancy provisions in commercial property policies can limit coverage after a specified period. Notify your agent when a building becomes vacant to explore available options.

Do I need flood insurance for my commercial building? Standard commercial property policies exclude flood. If your property is in a flood-prone area, a separate flood insurance policy is worth considering.

Should I require tenants to carry insurance? Yes. Requiring tenants to carry general liability insurance and name you as an additional insured is a standard and recommended practice for commercial landlords.

Working with an Independent Insurance Agent

Commercial property insurance programs vary based on building type, construction, occupancy, and location. An independent agent can help you evaluate your building's replacement cost, identify coverage gaps, and compare available options.

Harborstone Insurance & Risk Solutions works with Michigan commercial property owners and landlords. Contact us or request a business insurance quote to discuss your property.

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This article is provided for general educational purposes only and does not constitute insurance, legal, or financial advice. Coverage availability, terms, conditions, and exclusions vary by policy and insurer. Consult a licensed insurance professional for guidance specific to your situation.