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Probate & Property

Sept/Oct 2023

Insuring Lease Work Letter Construction Projects: The Most Important Things to Know – Part One (Liability Insurance)

Janet M. Johnson


  • When a landlord embarks on a construction-related leasehold improvements project for an existing or new tenant.
  • The insurer under a CGL policy typically has no duty to defend a party that the named insured is obligated to indemnify.
  • Understanding the appropriate types of insurance that should be procured and maintained during the construction of leasehold improvements under a work letter is no easy task.
Insuring Lease Work Letter Construction Projects: The Most Important Things to Know – Part One (Liability Insurance)
CHUNYIP WONG via Getty Images

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This article is Part One of a two-part series on insurance for construction projects governed by commercial lease work letters under which either the landlord or the tenant is responsible for engaging the contractor to perform the work. This part focuses on liability insurance. Part Two will focus on property insurance. This article is a companion to the recent two-part article published in Probate & Property magazine by Marie A. Moore and G. Trippe Hawthorne on lease work letters, which addressed the non-insurance obligations of the parties to a lease concerning the construction of tenant improvements to the premises.

Introduction to Insurance for Work Letters

When a landlord embarks on a construction-related leasehold improvements project for an existing or new tenant, both the landlord and the tenant must consider what type of liability insurance and what type of property insurance should be procured and by which party. This is also true when a tenant that either occupies or is planning to move into an existing building will be constructing leasehold improvements to its space. The insurance provisions contained in the body of the lease that govern property damage or personal injury claims may not suffice to cover the additional risks associated with a construction project. Tenant work letters (generally separate attachments to a commercial lease that outline what work will be done, who will perform it, and who pays for it) can cover anything from minor alterations to existing improvements, construction of a new building, or gutting and building out a brand-new space within an existing building. As each project differs, the insurable risks and coverages will vary.

This article does not cover the myriad other issues associated with work letters addressed by the Moore/Hawthorne article. In addition, it does not address all other insurance issues that might arise during construction, especially where the leasehold improvements to be constructed under a work letter are more complex, such as an addition to an existing building or a brand-new, build-to-suit building. These latter types of projects require consideration of many other types of insurance products. Instead, the focus of this two-part series is on the more customary types of insurance that should be considered for the two types of work letters discussed in the companion article: (1) a customary office lease work letter where the landlord is to construct the leasehold improvements for the tenant and provides an allowance to fund all or some portion of that work; and (2) a work letter for a retail or office space in which the tenant performs the construction and the landlord provides an allowance to fund all or some portion of that work.

Commercial General Liability Insurance

Commercial general liability (CGL) insurance is commonly required of both the landlord and the tenant in leases of commercial office and retail properties. Many other parties, however, will enter the premises within a building and common areas to perform portions of the work under a lease work letter. Entries by a contractor (and its subcontractors or sub-subcontractors) is inherently more likely to result in injury to persons or the property of the landlord, the tenant (if the work letter involves construction within a tenant’s existing space), and other tenants in multi-tenant buildings than the entries occurring under ordinary operations. The work of subcontractors or sub-subcontractors can also be damaged by persons performing other portions of the leasehold improvements work contemplated in a work letter.

What Is Covered by CGL Insurance?

A CGL policy is third party insurance because it covers injuries or damage suffered by third parties. It does not cover injuries or damages sustained by the named insured. If the policy covers an accident or occurrence on the property, CGL insurance pays defense costs and amounts that the insured must pay to a third party (up to the limits available under the policy). The entity that obtains the CGL insurance policy (CGL policy) is the “named insured.” The most commonly available Insurance Services Office, Inc. (ISO) form CGL policy (ISO CGL policy) is the ISO Form CG 00 01 04 13, with CG 00 01 indicating the type of commercial general liability coverage form and 04 13 indicating the month and year in which ISO adopted the form. In this policy form, the insurer generally agrees both (i) to pay “those sums that the insured becomes legally obligated to pay as damage because of ‘bodily injury’ or ‘property damage’” described in the policy as being covered and (ii) “to defend the insured against any ‘suit’ seeking those damages.”

The ISO CGL policy excludes the named insured’s contractual liability but also sets out an exception to this exclusion. Under the exception, the ISO CGL policy does not exclude liability that the insured would have had in the absence of agreement or liability for most “bodily injury” or “property damage” assumed in an “insured contract.” A lease is an “insured contract” (one of the six specified types of contracts covered by the exception to the exclusion). Thus, if the tenant’s lease includes an agreement to indemnify the landlord from bodily injury or property damage caused by a contractor engaged by the tenant under a work letter, the tenant may be assuming liability for the tort obligations of the contractor and even its subcontractors. For a more detailed discussion of this issue, see Marie A. Moore, Hiding the Pea, Insurer Style: Part Two, Uncovering the Tenant’s Contractual Liability Coverage, 35 Prob. & Prop. 64 (Nov./Dec. 2021).

The contractor and its subcontractors are not parties to the work letter, which means that any provision in the work letter obligating the contractor to carry insurance will not impose any obligations on the contractor. To assure the landlord and tenant that the contractor will provide coverage for the benefit of the party that is not entering into the construction contract with the contractor, the construction contract should obligate the contractor to carry CGL insurance for the benefit of the tenant and landlord as additional insureds. Ideally, the construction contract will also obligate the contractor to include in its contracts with its subcontractors (and those subcontractors to include in their sub-subcontracts) the same obligation to carry CGL insurance and to name the contractor, landlord, and tenant as additional insureds. Some lower-tier sub-subcontractors may object unless they include in their bids the premium cost of adding these parties as additional insureds to their CGL policies by endorsement.

The contractor’s obligation to carry CGL insurance naming the landlord and tenant as additional insureds does not prevent an injured person from suing either of them for injuries or property damage arising during construction under a work letter claiming the injury or damage was caused by the negligence of the landlord or the tenant. Suppose the tenant’s or landlord’s insurer responds under the exception to the exclusion for contractual liability in the tenant’s CGL policy. In that case, that insurer will have a right of subrogation against the contractor or another person that caused the injury or damage unless there is an explicit waiver of the right to assert claims against them in the construction contract with the person causing the injury or damage. Such a waiver is often called a waiver of subrogation. Some insurance policies automatically allow their insured to waive the right to make a claim (thereby preventing the insurer from asserting a subrogation claim) in a written contract. Sometimes a separate endorsement to the CGL policy will be required. Waivers of subrogation and the advisability of including waivers of CGL claims in construction contracts is a complicated issue beyond this article’s scope.

The Additional Insured

The insurer under a CGL policy typically has no duty to defend a party that the named insured is obligated to indemnify, such as a landlord under its lease with the tenant or a landlord under a tenant’s construction contract with the contractor, unless the named insured obtains a separate endorsement to that policy under which the insurer agrees to do so. This type of endorsement is called an additional insured endorsement, and the landlord should always expressly require such an endorsement in the lease with the tenant. But the form of additional insured endorsement often provided under a tenant’s CGL policy to satisfy a lease requirement during the tenant’s occupancy of the premises may not cover construction work performed under a work letter by a contractor engaged by the tenant.

For example, the ISO Form CG 20 11 12 19 Additional Insured – Managers or Lessors of Premises endorsement, frequently provided by a tenant for the benefit of a landlord, explicitly excludes “structural alterations, new construction or demolition operations performed by or on behalf of the [person identified as an additional insured].” If the tenant is to perform the work, the work letter should also require the tenant to require the tenant’s contractor and any subcontractors or sub-subcontractors engaged to perform the work to name the landlord as an additional insured by endorsement to their respective CGL policies. If the landlord hires the contractor, the landlord’s contract with the contractor also needs to explicitly require the contractor to provide CGL insurance naming the landlord as an additional insured, to include this same requirement in its subcontracts, and to require each subcontractor’s contracts with sub-subcontractors to include this same requirement.

Some CGL policies issued to contractors automatically include the landlord or tenant as an additional insured under policy language that expressly covers those persons the contractor must cover as additional insureds under its construction contracts. But this is not always enough. For example, suppose a tenant signs a contract with a contractor to construct leasehold improvements in its space, and the contractor’s CGL policy includes as additional insureds only those with whom the contractor has a contract requiring such parties to be named as additional insureds. In this situation, the landlord will not be covered as an additional insured because the landlord does not have a contract with the contractor. Instead, the contractor should be required to procure a separate additional insured endorsement to the contractor’s CGL policy that explicitly names the landlord as an additional insured. An ISO Form CG 20 10 12 19 Additional Insured—Owners, Lessees or Contractors—Scheduled Person or Organization endorsement could be specified.

On the other hand, if the additional insured endorsement to the contractor’s CGL policy or the CGL policy language itself includes as additional insureds any person the contractor is obligated by written contract to name as an additional insured (i.e., the language doesn’t require the written contract to be with the contractor), then as long as the contractor’s contract with the tenant obligates the contractor to name the landlord as an additional insured, the landlord will be covered as an additional insured. The ISO Form CG 10 40 12 19 Additional Insured—Owners, Lessees or Contractors—Automatic Status for Other Parties When Required in Written Construction Agreement (Completed Operations) endorsement could be used. Thus, what is required for any given work letter construction project will depend on what the contractor’s CGL policy and any additional insured endorsement say.

There are many different ways in which insurance companies write their CGL policies, so no single form of endorsement will work for all situations. The best advice is to request a copy of the original additional insured endorsement attached to the CGL policy and read the language to see who is considered an additional insured. If the additional insureds include only those parties with whom the insured has a contract and the tenant is engaging the contractor to perform the work under the work letter, then the landlord won’t be covered.

Another way a landlord can avoid gaps in coverage like this is to insist that every contractor, subcontractor, and sub-subcontractor entering onto the landlord’s property (regardless of whether they have a contract with the landlord or tenant or a contractor of either of them) sign a separate document with the landlord, sometimes called a right of entry agreement or access agreement. This agreement obligates those parties to name the landlord, its managing agent, and mortgagees as additional insureds under their CGL policies. The landlord must obtain a copy of the additional insured endorsements to ensure that the endorsement’s wording will cover it. Many landlords dislike the administrative burden of reviewing anything other than insurance certificates provided by tenants and contractors. They are even less likely to monitor insurance certificates from subcontractors or sub-subcontractors. If so, the landlord must either rely on indemnification provisions in the access agreement it has with the various tiers of subcontractors or sub-subcontractors (and hope the indemnitor has sufficient assets to cover any uninsured losses) or rely on the landlord’s own CGL insurance to defend and indemnify it against a claim for bodily injury or property damage by a third party during construction.

Coverage Provided to an Additional Insured

The two endorsements noted above are the most common ISO form additional insured endorsements relevant in the construction of leasehold improvements under work letters. These endorsements include limitations on the coverage the landlord or tenant will receive as an additional insured, raising drafting issues.

First, the contractor’s CGL policy will include the landlord or tenant as an additional insured for bodily injury or property damage (i) if caused, in whole or in part, by the contractor’s acts or omissions or for the “acts or omissions of those acting on [the Contractor’s] behalf. . . in the performance of [the Contractor’s] ongoing operations for the additional insured(s) at the location(s) designated” in the endorsement (in the case of the ISO Form CG 20 10 12 19) or (ii) “if caused, in whole or in part, by [the Contractor’s work] performed for the additional insured” “when [the Contractor] and the [Landlord or Tenant] have agreed in writing in a contract or agreement that [the Landlord or Tenant] be added as an additional insured on [the Contractor’s] policy” (in the case of the ISO Form CG 20 40 12 19). In other words, neither the landlord nor the tenant is covered for its own acts or omissions, even if it is named as an additional insured in the endorsement form or required to be added as an additional insured in the contract with the contractor. Thus, the coverage is only for the vicarious liability of the landlord or tenant (i.e., situations in which they are held responsible for the acts of a third party, whether that third party is the contractor or one of the contractor’s subcontractors or sub-subcontractors).

Second, each of these form endorsements states: “the insurance afforded to such additional insured only applies to the extent permitted by law” and “the insurance afforded to such additional insured . . . will not be broader than that which you are required by the contract or agreement to provide for such additional insured.” What this means is that the coverage afforded to the landlord or tenant by a contractor or subcontractor’s CGL policy will not apply if the construction contract obligates any of them to assume liability for the landlord’s or tenant’s acts if the law in the state prohibits them from assuming that liability. Likewise, the contractor’s insurance will not apply to the landlord’s or tenant’s vicarious liability arising out of the act of a subcontractor or sub-subcontractor unless the construction contract obligates the contractor to obtain insurance covering the actions of its subcontractors and sub-subcontractors.

Finally, these endorsements also limit the maximum amount paid under the policy to the lesser amount of (i) the insurance required by the contract identified in the endorsement or (ii) the amount available under the applicable insurance limits. The endorsement alone will not increase the applicable limits beyond what the work letter requires. An example can illustrate this issue. Suppose a tenant (or a contractor) agrees to indemnify the landlord for all accidents occurring on the premises during the work under a work letter and agrees to maintain $1 million of CGL coverage naming the landlord as an additional insured. Suppose the tenant or the contractor actually maintains $5 million of CGL coverage (whether it is in a primary policy or a combination of a primary policy and an excess or umbrella policy), a worker is seriously injured while on the job, and the landlord is held vicariously liable for $2 million of damages. If either the ISO Form CG 20 10 12 19 or CG 20 40 12 19 additional insured endorsements were part of the CGL policy procured by the tenant or landlord, the insurer will not be required to pay any amount for which the landlord is found liable that exceeds the $1 million coverage limit specified in the contract. The $1 million might also be reduced by earlier claims made by others against the CGL policy during the policy period.

To take advantage of the higher limits that the tenant carries, the landlord needs to include in its lease or work letter insurance provisions a statement that if the tenant carries higher limits coverage than the amounts specified in the lease or work letter, the landlord as an additional insured will be entitled to receive the benefit of these additional limits. If the tenant then engages the contractor to perform the leasehold improvements work, the work letter should contain a similar provision but require the tenant to include the statement in its contract with the contractor. Below is a sample of such a provision:

If [Tenant/Contractor] carries insurance coverage of one or more of the types required hereunder with limits higher than the limits required in this [Lease/Work Letter/Contract], the full amount of the insurance coverage carried by [Tenant/Contractor] will be available to respond to a covered loss or occurrence, and the coverage afforded to the landlord as loss payee, named insured, or additional insured, as the case may be, under such policy or policies will not be limited by the minimum coverage limits specified in this [Lease/Work Letter/Contract] but will be deemed increased to the amounts carried by [Tenant/Contractor].

The language limiting the maximum amount that will be recoverable in the ISO additional insured endorsement forms was adopted by ISO in 2013. Thus, it is too early for much case law to provide guidance on how the courts will interpret the endorsements’ limiting language. Likewise, there does not yet appear to be any case law interpreting the type of language suggested here in a lease, work letter, or construction contract where the tenant’s or contractor’s actual CGL policy limits exceeded those specified in the appropriate agreement. This means the most conservative approach for the landlord or tenant to take with a contractor performing work under a work letter is to specify limits of insurance as large as are appropriate given the size of the project (if the contractor has not yet been identified) or (if the contractor has been identified) to determine limits under the CGL policy carried by the contractor and require those same limits in the contract with the contractor, assuming they are sufficient for the scope of the work.

Limits of Liability

ISO CGL policy liability limits are provided per occurrence but are subject to two different annual aggregates. The per-occurrence limit applies to any occurrence that is covered by the policy. The aggregate limits reflect the maximum amount the insurance company must pay during the policy period, regardless of the number of occurrences. In most policies, there is a general aggregate limit applicable to all covered claims except those brought in a products-completed operations context, and there is a separate aggregate limit applicable only to products-completed operations claims. Specifying separate liability limits for bodily injury, property damage, and contractual liability is unnecessary—CGL policies have not been written this way for almost 30 years.

Tenants with many locations and contractors involved in many different jobs at different locations may have a general aggregate limit in their CGL policies that applies to all of their locations. The landlord cannot know if claims arising elsewhere have eroded or exhausted the general aggregate limit, leaving little to no protection for the landlord’s location. To avoid this risk, the landlord can require the full amount of the general aggregate limit to be available to the leased location alone. This can be done through a designated location(s) general aggregate limit (ISO form CG 25 04 05 09) endorsement. If the tenant or contractor cannot provide a designated location(s) general aggregate limit endorsement, a reasonable alternative is to request a higher excess liability limit and require the tenant or contractor to maintain the excess coverage until the final completion of the work.

In almost all cases, the landlord should draft its indemnity provision broadly in the lease or work letter or in its contract with a contractor (where the landlord rather than the tenant is to engage the contractor to perform the work) to include all liability for which the landlord wishes to be covered. Such a broad indemnification provision can be problematic in some jurisdictions. For example, Section 1(a) of the Illinois Landlord and Tenant Act, 765 ILCS 705/1(a), has been interpreted to prohibit a landlord from being indemnified for its own negligence and has also been held to prohibit the landlord from shifting to the tenant the obligation to maintain insurance for a personal injury caused by the landlord’s negligence. See, e.g., Whitledge v. Klein, 810 N.E.2d 303 (Ill. App. Ct. 2004). At least one other Illinois court voided the entire indemnification clause contained in a lease because it was overly broad. See Economy Mechanical Industries, Inc. v. T.J. Higgins Co., 689 N.E.2d 199 (1st Dist. 1997).

Many states also prohibit, limit, or condition the indemnification provisions in construction contracts where the provisions attempt to indemnify the indemnitee-additional insured for its negligence or fault. This means the landlord will not be able to make a claim against the contractor’s CGL policy if the landlord or its agents or employees somehow caused the injury or loss. Even in states where broad indemnification provisions are allowed, the tenant or contractor will want to resist indemnifying the landlord and landlord-related parties from their own negligence as a matter of fairness.

Whose Insurance is Primary?

Suppose a work letter or construction contract designates the tenant’s CGL policy or a contractor’s CGL policy as primary. In that case, the parties want the tenant’s CGL policy (or contractor’s CGL policy) to pay a covered claim up to the available coverage limits without seeking a contribution from the landlord’s CGL policy. This requirement, however, is not part of the ISO CGL policy form. Instead, the form provides that it will be considered excess over any other primary insurance available to the named insured. To avoid a claim by the contractor’s insurer that the landlord’s or tenant’s CGL policy is primary and the contractor’s insurance for their benefit is excess, another endorsement to the ISO CGL policy will be required. Typically, this is an ISO form CG 20 01 12 19 Primary and Noncontributory—Other Insurance Condition endorsement (ISO primary coverage endorsement). When this endorsement is included in a tenant’s (or contractor’s) CGL Policy, the coverage provided to the landlord (as an additional insured) under the tenant’s (or contractor’s) CGL policy becomes primary over the coverage the landlord maintains for itself. A CGL policy that includes an ISO primary coverage endorsement, however, is not primary to other coverage naming the landlord as an additional insured, such as coverage provided by other tenants in the landlord’s building under their CGL policies.

For the ISO primary coverage endorsement to be effective, there must be a written agreement in which the named insured has agreed that its insurance will be primary and will not seek contributions from other insurance available to the additional insured. Simply including a requirement that the tenant’s (or contractor’s) CGL insurance be primary in the lease or work letter will not suffice. There also needs to be an agreement that the insurer will not seek contribution from the additional insured. Below is an example of lease or work letter language requiring the tenant to obtain this type of primary and noncontributory coverage:

It is the intent of the parties to this [Lease/Work Letter] that all insurance coverage that the tenant is required to maintain in this [Lease/Work Letter] will be primary to and that this insurance will not seek contribution from any other insurance held by [Landlord Parties] and that [Landlord Parties’] insurance will be excess, secondary, and non-contributing. The general liability and excess umbrella liability policies will be so endorsed.

Below is an example of a provision for the construction contract (regardless of whether the tenant or the landlord engages the contractor to perform the work under a work letter) requiring the contractor to obtain the primary and noncontributory coverage afforded under the ISO primary coverage endorsement:

It is the intent of the parties to this [construction contract] that all insurance coverage that the contractor is required to maintain under this contract will be primary to and that this insurance will not seek contribution from any other insurance held by [the Tenant Parties or the Landlord Parties] and that the [Tenant Parties’ or Landlord Parties’] insurance will be excess, secondary and non-contributing. The general liability and excess/umbrella liability policies procured by the contractor under this policy will be endorsed.

Similar language must be included in the contractor’s contracts with its subcontractors for the subcontractor’s insurance policies to be primary for the insurance coverages obtained by the contractor, the landlord, or the tenant. Including this language in either the contractor’s contract or the subcontracts will not be effective, however, unless the contractor’s and subcontractors’ policies include such coverage either in the policies themselves or by an endorsement like the ISO primary coverage endorsement. The landlord or tenant must review the evidence provided by the contractor and its subcontractors regarding their insurance coverage.

Evidence of CGL Insurance

When a party relies on CGL insurance being maintained by another party, the party depending on the coverage must obtain proof that this coverage is in place, in the correct amounts, and with the correct coverage and endorsements. In most leases (and work letters), the landlord requires the tenant or contractor to produce certificates of insurance with respect to the CGL insurance they carry. These one-page forms are easy to administer, but ACORD promulgates the most commonly used forms for these certificates or evidence. ACORD is the Association for Cooperative Operations Research and Development, a nonprofit that serves the insurance industry by, among other things, developing standard forms. Its members are primarily insurance companies, so the ACORD forms reflect the interests of ACORD’s insurance company members, and those insurance companies do not want to be bound by a one-page form filled out by a clerk at an insurance broker’s office.

Unfortunately, landlords and tenants cannot rely on ACORD certificates of liability insurance as evidence or proof of CGL insurance. They are not proof or evidence of anything. The form states on its face that it is not binding on the insurer. The insurers have taken the position that a one-page form cannot override a policy that is composed of many pages of coverages and limitations on coverages. See W. Rodney Clement Jr., Is a Certificate of Insurance a Worthless Document?, 24 Prob. & Prop. 46 (May/June 2010). The most current version of the ACORD form issued in 2016 no longer provides that the insurer will give—or endeavor to give —the certificate holder notice of coverage cancellation. If the certificate holder wants this notice, it needs to obtain an endorsement of the insured’s policy in which the insurer commits to giving this notice. In addition, the certificate holder is not automatically an additional insured. Thus, the party that wishes to be an additional insured under another person’s CGL policy or wants another party’s CGL insurance to be primary must obtain a copy of the actual endorsements included in the CGL policy.

Moreover, language in the work letter that merely requires the tenant or contractor to provide a certificate of insurance issued to the landlord is insufficient. The work letter or construction contract between the parties must specify the type of insurance the parties are to carry and must identify the person or persons the other party must name as additional insureds under the policies. See Old Republic Ins. Co. v. Gilbane Bldg. Co., 2014 Ill. App.123430 (1st Dist. 2014). In the Gilbane case, a general contractor sought a defense and indemnity from a subcontractor’s insurer in a lawsuit filed by an employee of another subcontractor injured on a construction project. The insurer filed a declaratory judgment action seeking a determination it did not have to defend or indemnify the contractor because the insurance specifications in the subcontractor’s contract only required the subcontractor to name the contractor as an additional insured on certificates of insurance. The certificate provided by the subcontractor named the contractor as the certificate holder and stated that the contractor, the owner of the property on which the injury occurred, and another third party were included as additional insureds “per the terms and conditions of the contract.” The contract language, however, did not require the subcontractor to add the contractor as an additional insured on its CGL policy. Based on this unambiguous contractual language, the court held the contractor was not entitled to be defended or indemnified when the subcontractor’s CGL policy did not name the contractor as an additional insured. The contractual obligation was satisfied when the contractor received a certificate of insurance stating it was an additional insured.

The best approach when relying on the insurance that another party is maintaining under a work letter is to include language in the work letter or other contract (such as a construction contract with the contractor performing the work) requiring that the party maintaining the CGL coverage provide a certified copy of the policy itself or at least the declarations pages, the schedule of forms and endorsements comprising the policy, and copies of all endorsements that are needed to evidence the required coverage. The party relying on the coverage must review the documents provided to ensure the required coverage is included in the relevant CGL policy and that there are no other endorsements to that CGL policy that diminish the required coverage and to be sure the CGL policy has not expired.


Understanding the appropriate types of insurance that should be procured and maintained during the construction of leasehold improvements under a work letter is no easy task. CGL insurance (and property insurance or builders risk insurance, to be discussed in the upcoming Part Two of this article) are not the only types of insurance that may be required, but those other types are beyond the scope of this article. When insurance is required, the parties must also ensure all the necessary insurance is in place before construction commences. Landlords or tenants who infrequently undertake the construction of leasehold improvements should consult an insurance agent, broker, consultant, or provider who is experienced in dealing with construction projects and who will know what questions need to be asked for the landlord or tenant and contractor to be assured (as best they can) that the right coverages for the right amounts and for the right period of time have been procured.