# Caps and Limits on Insurance Pass-Throughs in a Net Lease

Source: https://www.creshield.com/resources/insurance-increase-caps-net-lease
By Brad Cottam, CRE Shield (licensed in Kansas and Texas). Updated 2026-10-28.

Most net leases let the landlord pass insurance cost through to the tenant, but some limit how much. The limit may be an explicit **cap on annual increases**, a rule that only **"reasonable" or "commercially competitive"** insurance is reimbursable, or a restriction to **coverage the lease requires**. When premiums rise faster than the lease anticipated, these limits decide who absorbs the difference, so it pays to find them before renewal, not after the invoice goes out.

## Where limits hide

1. **Controllable expense caps.** Some leases cap annual increases in operating expenses (for example 5% over the prior year) but exclude "uncontrollable" items such as taxes and insurance. Others do not exclude insurance. Read the definitions.
2. **Defined terms.** "Operating expenses," "controllable expenses" and "insurance costs" may sit in different sections.
3. **Reasonableness language.** "Commercially reasonable," "customary for similar properties," or "at competitive rates" give the tenant an argument if the landlord chose costly coverage.
4. **Required coverage only.** Some leases reimburse only coverage the lease requires, not everything the landlord decides to carry.
5. **Cumulative vs non-cumulative caps,** and base-year mechanics that reset the starting point.

## What a cap looks like in practice

Suppose the building's premium last year was $8,000 and the lease caps increases at 5%, with insurance not excluded. This year's premium is $11,200.

- The cap allows a billed amount up to $8,400.
- The landlord absorbs $2,800.

If insurance is excluded from the cap, the tenant owes the full $11,200, subject to any reasonableness limit.

## What to do when premiums rise

1. **Read the clause first.** Know what you can pass through before the invoice goes out.
2. **Shop the coverage.** Show that you tested the market. A documented comparison is the strongest evidence of reasonableness.
3. **Review the coverage choices.** Deductibles, limits and roof terms drive cost. Confirm what the lease requires and what you added. See [replacement cost vs actual cash value](/resources/replacement-cost-vs-acv) and [roof age](/resources/roof-age-commercial-insurance).
4. **Document the reason** for an increase: carrier rate change, revised valuation, claims activity in the area, or a renewal after a loss.
5. **Tell tenants early** when a material increase is coming, with the reason.
6. **Consider the lease for the future.** On renewals or new leases, write clear language about what is reimbursable and how increases are treated.

## Why timing matters

In a hard market, premiums can move faster than a lease written years ago expected. A lease with a tight cap and a long term leaves the landlord with the gap, and an older lease may require limits that are no longer adequate. Revisit both when you can.

## FAQ

### Can a landlord pass through any insurance increase?
Only as far as the lease allows. Look for caps, reasonableness standards and limits to required coverage.

### Is insurance usually inside or outside the expense cap?
It varies. Many leases treat insurance and taxes as uncontrollable and outside a cap, but not all do.

### What if I carry more coverage than the lease requires?
You may need to absorb the extra cost unless the lease allows recovery of coverage the landlord reasonably chooses to carry.

### How do I show a premium is reasonable?
Document the market: quotes from more than one carrier, and the reasons for the carrier's pricing.

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*This article is general education, not insurance or legal advice. Lease terms vary. Have your lease reviewed by a qualified professional. The numbers above are illustrative. CRE Shield is licensed in Kansas and Texas and transacts insurance only in states where it is licensed.*