Learn about improvements and betterments insurance coverage - which are made to a building occupied, but not owned by the insured tenant. These improvements and betterments must remain with the building - even when the insured moves out.
Improvements and Betterments Insurance Coverage
Improvements and Betterments coverage protects a tenant's use of and interest in improvements and betterments it installs or arranges for in the leased building. This coverage is available to only named insureds that are tenants.
The insured may have made the improvements and betterments that are eligible for coverage or a previous tenant may even have made them but only if the insured purchased them from that tenant. The important point is that the insured has invested in these items but cannot remove them.
This coverage is part of CP 00 10-Building and Personal Property Coverage Form. Because the insured cannot remove improvements and betterments from the premises, but has a use interest in them, a special method for valuing tenants' improvements and betterments is a part of the coverage form. Here we take a deeper dive into improvements and betterments insurance coverage for tenants.
What Is Improvements and Betterments Insurance Coverage?
Definition: Improvements and betterments are defined as fixtures, alterations, installations, or additions that become a part of the described building that the tenant makes or acquires at its expense. It does not include rent paid. The tenant cannot legally remove them from the building.
Improvements and betterments are actually improvements to the real estate or to the building that the tenant or lessee installs or pays for or that it acquires at its expense, exclusive of rent paid. They are permanent in nature. Some examples are a new storefront, decorations, partitions, acoustical insulation, and elevators. They usually represent significant value but they are not personal property because the tenant cannot remove them.
Improvements and betterments eventually become part of the building and the building owner's property. The building owner should insure them as part of its building coverage. However, the tenant also has an interest in them and can insure them as such because it installed or acquired them at its expense for its own benefit while it occupies the premises.
This is described as the use interest in the improvements and betterments. Courts and others use it to attempt to more accurately describe the type of insurable interest a tenant has in the improvements and betterments as opposed to an outright ownership interest.
Where Do You Buy Improvements and Betterments Insurance Coverage?
Improvements and Betterments coverage may be written as either separate insurance or as part of the coverage on personal property in CP 00 10-Building and Personal Property Coverage Form.
Improvements and betterments insurance coverage covers the insured's use of and interest in improvements and betterments made or added to a leased building.
When arranging loss recovery on an unamortized basis, the recovery is based on a proportion of the original cost of installing the improvements and betterments. For example, the insured tenant makes alterations or improvements and must spend $5,000 to remove a portion of the existing building to make the changes. It then installs the improvements valued at $10,000. This coverage enables the tenant to recover an insured loss based on the entire $15,000 installation investment. Recovery on this basis makes the insured whole and also enables it to properly amortize the entire investment, including the $5,000 wrecking or tearing-out expense.
However, if the insured tenant actually replaces the damaged improvements, the form properly limits it to the actual cash value of the damaged improvements. This is because it would then be necessary to restore the improvements themselves and not again incur the expense of tearing out any portion of the building. In some cases, and for these reasons, the original cost may exceed the actual cash value.
Improvements and betterments coverage is subject to coinsurance. Whether listed separately or included with other personal property, a coinsurance penalty is applied if not insured to current actual cash value.
If a covered cause of loss damages or destroys improvements and betterments during the policy term, payment is determined as follows:
The actual cash value of the lost or damaged property is paid if the insured makes repairs. These repairs must be made promptly. A proportion of the original cost is paid when the insured does not repair or replace the items in a reasonable time period. This proportion is calculated as follows:
- Determine the original cost of the damaged improvement and betterments.
- Determine the number of days from the date of loss to the expiration date of the lease or the expiration of any lease renewal option.
- Multiply Step 1 by Step 2.
- Determine the number of days from the date that the damaged improvements and betterments were installed to the expiration date of the lease or the expiration of any lease renewal option.
- Divide Step 3 by Step 4.
For example: XYZ Industries leases a building on a 20-year lease with a 10-year renewal option. XYZ made substantial improvements to the building at its own expense that cannot be removed. The cost of the improvements was $200,000 when the lease was signed in January 2008. A windstorm destroys the building in January 2018 and XYZ decides to relocate to another state. The loss payment is determined as follows:
- Step 1: Cost is $200,000
- Step 2: 20 years X 365 days = 7,300
- Step 3: $200,000 X 7,300 = $1,460,000,000
- Step 4: 30 X 365 = 10,950
- Step 5: $1,460,000,000 / 10,950 = $133,333
XYZ receives $133,333 for its loss of use value of the improvements and betterments.
Replacement Cost Optional Coverage
Improvements and betterments may be written on a replacement cost basis instead of on an actual cash value basis. In that case, if the insured actually repairs or replaces the improvements and betterments, it recovers on that basis. However, the proportional method is used to determine the settlement if the insured does not make the repairs or replace the improvements.
Coverage on improvements and betterments may be written for a tenant that occupies a building under a conventional term lease, on a month-to-month basis, or under another form of rental agreement. The insured is not required to actually occupy the building to be eligible for coverage.
Coverage may also be written for a lessee that has installed or acquired improvements and betterments at its expense and subleases or rents the premises to others.
Improvements and betterments are not limited to those installed during the term of the current lease. Coverage also applies to those made to the building or that the insured acquired at its expense at any time during its tenancy.
Duplicate Coverage Issues
Duplicate coverage may apply in cases where neither the building owner nor the tenant repair the damage or replace the property. In such cases, the tenant could collect based on the proportion of its use interest in the improvements and betterments and the building owner could receive the actual cash value of the improvements and betterments because the building coverage limit should include them.
However, if the building is repaired and improvements and betterments replaced, coverage applies to only the party that actually made the repairs or replaced the improvements and betterments.
How Much Does Improvements and Betterments Insurance Coverage Cost?
The way improvements and betterments are scheduled determines the rate used. The personal property rate is used if the improvements and betterments are included in the same limit as other personal property. The building rate is used if they are listed and scheduled separately.
This difference is logical because the tenant cannot legally remove the improvements and betterments from the building without damaging the building. This property usually falls into the category of building and the insured should benefit from using the building rate.
At times, the insured might not want to schedule the improvements and betterments insurance coverage separately because the values are low. The insured is penalized when it makes that decision and the higher personal property rate is used.
Building Owner's Interest
The building owner has an interest in the improvements and betterments because they revert to it when the lease ends. As a result, the building owner's coverage should include the value of all tenants' improvement and betterments in its building values.
The tenant's policy should not include the building owner as an additional insured with respect to these improvements and betterments because the interests of both parties in the property are not the same. The only time the building owner could be added is when the tenant is contractually required to compensate the building owner for damage to its improvements and betterments.
Improvements and Betterments Insurance Coverage And Leases
Leases must be reviewed carefully to determine exactly who owns the improvements and betterments. Standard wording usually states that all improvements and betterments become the building owner's property but there may be exceptions. This is particularly important if extensive improvements and betterments are made at a specific property.
The lease should list the property that can be removed when the lease ends and the property that must remain. The property that remains is the improvements and betterments. In most cases, the permanently installed property becomes the building owner's property at the end of the lease and property easily removed belongs to the tenant.
An important exception to this rule involves any property that specifically refers to the tenant by name or trademark. The lease should identify and address these situations.
Improvements and Betterments Insurance Coverage - The Bottom Line
We hope this article on improvements and betterments insurance coverage was informative and you have a clearer understanding of this coverage.
Further Reading On Business Property Insurance
- Commercial Flood Insurance
- Commercial Property And Business Interruption Insurance
- Commercial Property Insurance Basics
- Commercial Earthquake Insurance
- Flood Insurance Requirements For Commercial Property
- How To Calculate Commercial Property Insurance Rates
- Improvements & Betterments Coverage
- Landlord Insurance
- Types Of Insurance For Landlords
- Waiver Of Subrogation In Commercial Property Insurance