Triple-net (NNN) properties are a favorite among investors for a reason: predictable income, fewer landlord responsibilities, and long-term tenants. On paper, it feels almost hands-off. Taxes? Tenant pays. Maintenance? Tenant pays. Insurance? Tenant pays. Perfect, right?
Not so fast.
According to National Real Estate Investor, one of the most common mistakes property owners make is assuming tenant insurance provides the same protection as a well-structured owner’s policy. It doesn’t. And when disaster strikes, that false sense of security can cost you millions.
Let’s talk about why leaving the entire insurance burden on your tenant is a gamble you don’t want to take.
1. Tenants Insure for Themselves, Not for You
Here’s the thing: your tenant’s policy is designed to protect their business operations. Their insurance priorities are loss of income, liability, maybe equipment coverage—not your property’s full replacement cost.
Take a restaurant tenant as an example. Their broker may recommend limits to get them back in business quickly after a fire—but that doesn’t guarantee your $4M property is fully covered. Their goal is survival. Yours is asset protection.
2. Underinsurance Is Rampant
Data from the Insurance Information Institute shows that 60% of businesses are underinsured by at least 40%. That means if a tenant’s coverage is your only safety net, odds are high that you’ll come up short.
Imagine your retail center is insured by the tenant for $2M. A catastrophic storm levels the building, but replacement cost comes in closer to $3.5M. That $1.5M gap? It’s yours to cover—because your tenant didn’t buy enough.
3. Coverage Gaps & Claims Confusion
Even when limits look decent on paper, the devil is in the details. Whose policy responds first in a major claim—yours or theirs? What if the tenant forgets to renew, or changes carriers without telling you? What if their liability coverage excludes something unique to their operations?
You don’t want to discover those gaps while standing in front of a burned-out building, arguing with adjusters about who’s responsible.
Things can be even worse on the casualty side of your insurance. With a property claim, the maximum potential loss is the value of the building and any associated expenses. With a liability claim, the maximum potential value of a loss is infinity. As Lindsey Lohan said, “The limit does not exist!”
A recent study by the Maryland Injury Law Center found that premises liability claims, typically resulting from bodily injury that occurs on your premises, averaged $643,000+ in 2023. If your tenant’s insurance fails to adequately address a loss like this, you’re stuck paying to defend yourself as well as paying your attorney fees out of pocket.
4. Your Cash Flow Isn’t Invincible
Investors love NNN properties because of the steady, mailbox-money cash flow. But a single uncovered claim could erase years of rental income. The math is simple: why risk long-term wealth for short-term convenience, when an owner’s policy can lock in real security?
The main two reasons we hear from NNN operators for why they push the insurance program responsibilities are 1. Operational convenience, and 2. Better tenant relations.
Which is less convenient: Spending no more than time than an hour or two a year with your insurance broker to ensure that you have the right insurance details in place?…
Or spending many hours with your attorneys dealing with a huge mess caused when your tenant’s insurance didn’t adequately protect your asset or your liability?
As for the tenant relations piece, you may think it’s more attractive as a landlord to not hand your tenant a bill for their part of the insurance every year. But, what you’re inadvertently doing when you make the insurance wholly their responsibility is inviting them to be a part of a lawsuit and potential existential problem in a future loss.
Besides, you’re not even saving them much money by letting them handle the insurance themselves. Here’s some hypothetical numbers that align well with what we see in the marketplace.
Example:
Let’s say you own a 1997 built retail center, with masonry and concrete construction, with a TPO membrane roof with 120,000 rentable square feet. Let’s say you have 15 tenants. The right insurance coverage for your property carries an all-in annual cost of $111,000 with Chubb Insurance, one of the companies RiskWell is proud to represent for risks like this.
For your information, that $111,000 estimate includes a building valuation of $27 million ($225/sq ft), Commercial Property Insurance cost of $81,000, General Liability Insurance cost of $9,000, a $10 million limit Commercial Liability Umbrella cost of $15,000 and Mechanical Breakdown Insurance cost of $6,000.
If you’re in a coastal or severe weather prone geography, the estimate would be much higher. But, the above is good for a rough average.
When you break out the pro-rata cost that will be passed to the tenants, it’s $0.93 per square foot a tenant occupies. So, that anchor tenant that takes up 50,000 square feet of your building is only paying $46,250 a year for their part of your insurance cost.
That’s not exactly going to rock the boat with your tenants. The variance between that cost and what they can secure for themselves that meets your requirements might be 10-15% at most.
A Real-World Example: When Tenant Insurance Falls Short
One of our clients in Tennessee owned a multi-tenant retail center on a NNN lease structure. They relied on their anchor tenant’s insurance to cover the building. Then a late-night electrical fire tore through the property, causing more than $2.8M in damage.
Here’s the problem: the tenant’s policy had a $1.5M building limit—set years earlier, based on their lender’s requirement, not the true replacement cost. Their insurer paid out quickly, but it only covered a little over half of the actual rebuilding expense.
The property owner had to step in to cover the $1.3M shortfall out of pocket, plus months of lost rent during reconstruction. What should have been a “hands-off” NNN investment turned into a seven-figure nightmare—one that could have been avoided with a properly structured owner’s policy.
The Bottom Line
Tenant insurance is essential—but it was never meant to shoulder the entire burden of protecting your property. As the owner, you carry the most at stake. That means you need your own policy structured around your investment’s true value.
Don’t gamble with your portfolio. Protect it.
Want to make sure your property is fully insured, without relying on your tenant’s paperwork? Let’s talk. We’ll build a coverage plan that protects your assets and interests while remaining cost effective and convenient for both your team and your tenants.
To schedule your RiskWell Review, you can visit this link or call our office at 469-678-8001.