Which statement best describes the insurance requirement in the lease?

• A. The lessee does not need to carry property insurance.
• B. The lessee must carry property insurance but not name the lessor.
• C. The lessee must carry comprehensive, all-risk property insurance naming the lessor as loss payee.
• D. Insurance is optional.

Answer: (C)

Protection of the lessor’s collateral through insurance is the main idea here. In a lease, the asset itself is the lender’s security, so the lessee is typically required to carry property insurance on the leased item. The coverage is described as comprehensive or all-risk, meaning it covers most risks that could damage or destroy the asset, subject to standard exclusions. The crucial part is naming the lessor as loss payee on that policy. This designation ensures that if a covered loss occurs, the insurer pays the proceeds to the lessor to protect the lease still owed—whether that means repairing or replacing the asset or applying funds to satisfy the remaining balance.

This arrangement protects the lessor’s financial interest and keeps the lease protected even if the asset is damaged. If the lessor isn’t named as loss payee, there’s a risk the funds could go to the lessee or be used for other purposes, potentially leaving the lease obligations unsecured. Insurance being mandatory and covering the asset is standard practice, whereas saying insurance is optional or that it doesn’t need to name the lessor would weaken the protection the lease relies on.