Insurance pass-throughs appear in nearly every NNN franchise lease reconciliation, typically as a single aggregate line or broken into two or three categories. They look straightforward — until you realize that what your landlord insures under a "property insurance" policy may cover assets and liabilities that have nothing to do with your lease or your location.
Understanding what belongs in the insurance pass-through is the first step to verifying it.
What Insurance Costs Are Legitimately Passable
In a standard NNN lease, the landlord may pass through the cost of insuring the common areas and the building structure against the risks typical for commercial property:
Building property damage insurance (all-risk or special form): Covers physical damage to the building from fire, windstorm, water damage, and similar perils. This is the primary insurance cost in most reconciliations and the most clearly passable under NNN lease terms.
Commercial general liability (CGL) insurance: Covers bodily injury and property damage claims arising from operations at the property. If a visitor slips in the parking lot and sues the landlord, CGL responds. This is typically passable as a CAM expense.
Umbrella and excess liability coverage: Provides additional limits above the CGL and other underlying policies. Most leases allow umbrella coverage for the property, as long as the umbrella is allocated proportionately when it covers multiple properties.
What's Typically Excluded
Your lease's excluded expenses list should identify which types of insurance the landlord cannot pass through. Common exclusions include:
Errors and omissions (E&O) insurance for the landlord entity or property management company. E&O covers professional mistakes by the landlord or their management firm — lease documentation errors, management advice mistakes, and similar professional liability. This is a business risk of the landlord's operations, not a property operating cost.
Directors and officers (D&O) liability coverage. D&O protects the personal assets of the landlord entity's officers and directors from lawsuits related to their governance decisions. No NNN lease permits this as a passable CAM cost, but it occasionally appears in blanket policy allocations.
Life insurance or key-person insurance on the landlord's principals. Clearly not a property operating cost.
Deductibles and self-insured retentions on property claims. Insurance deductibles are losses, not premiums. When the landlord files a property claim and pays a deductible, that deductible is the landlord's risk retention — not an operating cost eligible for pass-through. Most leases specifically exclude deductibles from CAM. A deductible appearing as an "insurance expense" line item is a common pattern that CAMAudit flags.
Workers' compensation for the landlord's in-house employees. Workers' comp for the landlord's own staff is a payroll-related overhead cost, not a property expense. If it appears in the insurance section, check whether your lease's management fee definition already covers it.
The Blanket Policy Problem
Here is where insurance pass-throughs get complicated for franchise operators.
Large commercial property owners and REITs often insure their entire portfolio — 50, 100, or 500 properties — under a single blanket property insurance policy. The total premium for the blanket policy is then allocated across properties.
If that allocation is done correctly (based on building value, replacement cost, or insured value of each property), the per-property cost may be reasonable. But blanket policies frequently introduce errors:
The allocation methodology isn't disclosed. Your reconciliation shows an insurance line item of $18,400. Was that derived from an actuarial allocation based on replacement cost? A simple per-property average? An allocation based on revenue? Without seeing the methodology, you can't verify the number is proportionate.
The blanket policy includes coverage not applicable to your property. A blanket policy covering a mixed portfolio might include pollution liability for industrial properties, flood insurance for coastal properties, or earthquake coverage for California properties. If these coverages are allocated across all properties uniformly, you may be paying for risks that don't apply to your location.
Over-coverage for shared-use or anchor-specific facilities. If the blanket policy includes higher property values for an anchor tenant's specialized build-out, and that cost is spread across all tenants, in-line tenants are subsidizing coverage for the anchor's improvements.
How to Verify the Insurance Pass-Through
Step 1: Request the insurance certificate of coverage (Certificate of Insurance or COI) for the property. This shows the carrier, policy type, coverage limits, and premium. For blanket policies, request the allocation methodology documentation.
Step 2: Calculate what a standalone policy for your property's building would cost. Replacement cost for a community shopping center typically runs $80–$150 per square foot depending on construction type. Multiply total building RSF by replacement cost, then apply a reasonable commercial property insurance rate (typically $0.15–$0.35 per $100 of insured value, though this varies significantly by location, construction, and hazard exposure). This gives you a rough order-of-magnitude check on whether the billed amount is plausible.
Step 3: Verify exclusions. Confirm deductibles aren't included in the line item. Check whether any non-property coverages (D&O, E&O, life insurance) appear in the allocation.
Step 4: Confirm your pro-rata share is applied to the property-specific insurance cost, not to a portfolio-wide total.
When the Insurance Line Jumps Year-Over-Year
Insurance premiums for commercial property have risen materially in recent years due to higher claims frequency in catastrophe-exposed areas and carrier consolidation. A year-over-year increase in the insurance line isn't automatically suspicious.
What is worth verifying: whether the increase reflects market conditions at your property's specific location and risk profile, or whether it reflects the landlord adding coverage that benefits the landlord entity rather than the property.
Check your reconciliation against CAMAudit to flag insurance pass-through patterns that don't match typical lease terms.
Frequently Asked Questions
What if the landlord only provides a single total for "insurance" without breaking it into types?
You're entitled under your audit right to request supporting documentation, which includes the insurance bills or policy allocation schedule. A single aggregate line without breakdown doesn't give you enough information to verify compliance with the excluded expenses list.
Can the landlord pass through flood or earthquake insurance?
It depends on your lease and whether the coverage is specifically for your property. Flood and earthquake insurance for a property in a flood-plain or seismic zone is a legitimate cost for that location. If the coverage is part of a blanket policy and your property doesn't have meaningful flood or earthquake exposure, the allocation may be inappropriate.
Is workers' compensation ever a legitimate CAM expense?
Workers' compensation for maintenance staff who maintain common areas (janitors, landscapers, maintenance technicians) can be a legitimate operating expense if it's paid by the landlord directly rather than through a management company overhead. Workers' comp for the property management company's own employees is typically overhead covered by the management fee, not a separate pass-through.
Does the landlord have to use the cheapest available insurance?
No. Most leases give the landlord reasonable discretion in selecting carriers and coverage limits. The lease doesn't require the landlord to shop the market every year. However, the coverage must be for risks applicable to the property, and premiums must be allocated correctly if a blanket policy is used.
What if my own business insurance overlaps with the landlord's building insurance?
Your liability insurance and the landlord's liability insurance typically serve different purposes — yours covers your operations inside your space, theirs covers the common areas and building. Overlap in coverage types doesn't mean you're paying twice for the same protection; you're insuring different scopes.
Can the landlord include loss-of-rents insurance in the pass-through?
Loss-of-rents (business income) insurance protects the landlord if rent is lost due to a covered property damage event. This is a landlord-specific financial risk, not a property operating cost. Most leases exclude it from passable expenses, though some older or less carefully drafted leases don't address it explicitly.