Insurance Community University Tenants Improvements and Betterments and Insurance 1 The webinar will begin shortly. There is no audio at this time

Insurance Community University

Tenants Improvements and Betterments and Insurance

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DisclaimerInsurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions;

and state jurisdiction. This instructional materials provided by Insight is intended as a general guideline and any interpretations

provided by the instructor or the creator(s) of this material do not modify or revise insurance policy language. In providing these

materials, the authors assume neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of the instructional

materials provided. Copyright 2010 – 2014 All Rights Reserved

www.insurancecommunitycenter.com

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Your Instructor Today

Laurie Infantino, CIC, AFIS, CISC, ACSR, CISC, CRISPresident and Co-Founder of

The Insurance Community Center


What This Course Will Cover

This course will focus on reviewing lease requirements relating to TIB’s; who is responsible to insure the TIB’s; valuation; and the placement of insurance. The following topics will be discussed.1.What constitutes Tenants Improvements and Betterments; Alterations; Personality; Trade Fixtures2.Overview of the challenges in insuring TIB’s3.Lease Review4.Policy Review for insuring TIB’s

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Polling Question #1

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1) What constitutes Tenants Improvements and Betterments;

Alterations; Personality and Trade Fixtures?

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Tenants Improvements and Betterments (what they constitute)• Improvements or Betterments refer to

permanent, constructive additions made to the interior OR exterior of a building. Often when a tenant leases commercial space, the space is provided as a shell, without the fixtures the tenant requires to carry on operations.

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Alterations and Personality

• Sometimes referred to as “alterations”• Could include “trade” fixtures or stylist

improvements sometimes referred to as “personality”

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Alterations and Personality

• Stylistic to the branding of the operation

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Trade Fixtures

• Trade fixtures may be removable at the lease termination (refer to lease)

• Property items to be removed by tenant upon lease termination

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Polling Question #2

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Examples

• They can include common types of changes to an empty space or a space occupied by a prior tenant such as:– Interior/Dividing walls– Acoustical insulation– Kitchens/bathrooms– Permanently installed shelving or cabinetry

fixed seating – Internal wiring or plumbing

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Tenants Improvements and Betterments (Who Installed Them?)• The term Tenants, Improvements and

Betterments would “imply” that a tenant installed the improvements– Installed by tenant at tenant’s expense– Installed by a prior tenant– Substantially installed by a prior tenant and

altered by the current tenant

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Tenants Improvements and Betterments (Who Installed Them?)• Installed by lessor at their own expense

as an enticement for a long term lease• Installed by lessor and paid for by the

tenant by virtue of increased rent• Installed by lessor at “no” charge

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What all of these definitions have in common is that….• Tenants, Improvements and

Betterments (TIB’s) are a very expensive investment for a business that is leasing premises and investing in permanent building attachments that may or may not be subject to removal at the end of their lease.

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Lease Review

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Polling Question #3

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Lease Review

• Look at entire lease• When you send a letter to insured do

NOT say you reviewed the entire lease.• Indicate those specific sections and sub-

sections you reviewed

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Lease Basics

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Lease Review Sections as relates lease• INSURANCE

– Tenant’s Policies of Insurance• Insurance covering….

– All of the Tenant Improvements, Alterations and Personality

– Plate Glass in the Premises (Tenants Glass End)– Air Conditioning Unit Servicing the Premises

» Quite often, an argument arises when a lease states that the tenant must replace owner-installed fittings if they are damaged or destroyed.

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Air Conditioninghttp://www.propertycasualty360.com/2003/10/15/improvements-betterments-revisited• A severe winter storm, followed by subzero temperatures,

caused the pipes to freeze. One of our clients was a tenant in a multi-occupancy building.His lease made him responsible for the air conditioning apparatus on the roof, which was damaged.

• Although the cause of the loss was covered, the property wasn’t. Our tenant-insured had not paid to have the equipment installed in the first place. Despite that, the lease made him responsible for it. Since he was a tenant, he didn't carry any building coverage so was left with an uninsured loss.

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Air Conditioninghttp://www.propertycasualty360.com/2003/10/15/improvements-betterments-revisited

Agents should be aware of such potential coverage gaps when handling insurance for tenants, because tenants logically may assume that the "improvements and betterments" mentioned in their leases are automatically insured through the T & B provisions of their insurance policies.

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– Policy Form of Tenant’s Insurance and Limits

• All Policies required will be issued by insurance companies qualified to do business in the state

– Rating of A– Financial Rating of X or better according to Best’s

Insurance Guide….

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– Policy Form of Tenant’s Insurance and Limits

• 100% of replacement cost• Against Direct Physical Loss• Deductible not to exceed $1,000.00 per policy• Policy must contain a provision that the

company will give to Landlord written notice twenty (20) days in advance of any cancellation or reduction in coverage

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Lease Review Sections as relates lease• MAINTENANCE

– This section obligates the tenant to repair or replace their leased premises. (example of language)

– Tenant agrees to maintain their premises and make all repairs and replacements in and to the premises. This requirement includes any repairs to the tenant’s work, any alterations, and any distinguishing refinements to the premises referred to as “personality”.

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The Question is HOW to Insure

• "When the insurance is required by the lease document, be it real or personal property, the insured/tenant must satisfy the contractual requirement via an insurance product or self-insure. The lease establishes the insurable interest—BUT OFTEN NOT SO CLEARLY. http://www.propertycasualty360.com/2003/10/15/improvements-betterments-revisited

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Policy Review

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Insurance Issues/Insurance Solutions

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Your Business Personal Property Separation of Coverage Form• Can separate out TIB’s• TIB’s will then take the building rate• If separate out then you can add

Building Ordinance to TIB’s more simply• This could also have been done by

activating the Building Coverage but many companies will not allow that solution

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BOP TIB

• Does not include the term “use interest” (3)Tenant's improvements and betterments.

Improvements and betterments are fixtures, alterations, installations or additions: (a) Made a part of the building or structure you occupy but do not own; and(b)You acquired or made at your expense but cannot legally remove;

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Use Interest• No definition in the policy• The general accepted understanding of

“use interest” is that the party to the contract that has “use interest” has an insurable interest while using a premises or TIB and that insurable interest ceases when the insured is not longer in control of the premises. This term is used in the valuation clause of the policy

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Acquired or Made at their expense• There is no definition of “acquire” in the

insurance policy. It is generally assumed that the term “acquire” means that someone paid for something. However, the term “acquire” can include: to receive, accept, to come into possession, ownership, or control of the property. Most of these definitions for “acquire” do NOT require that the tenant paid for them.

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Acquired or Made at their expense• However, if that were the argument, it

could be contended that the tenant did, in fact, pay for them by virtue of the amount they pay for rent. The landlord clearly would have considered all of the building items and improvements in setting the rate of lease payments.

• http://dictionary.findlaw.com/definition/acquire.html#sthash.ej4TnMAF.dpuf

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Acquired

• We have often taught that the TIB paragraph should read– (b) You acquired; or made at your expense; or are

contractually obligated to insure but cannot legally remove.

• While we advise that this language is stronger in support of coverage for the tenant that is required to insure the TIB’s left by a prior tenant; the reality is that the insurance companies are not willing to make these editorial changes.

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Can Not Legally Remove

• This language would “preclude” coverage for additions and alterations that the tenant “can” remove based on lease language.

• How do you provide insurance under those circumstances?????

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Trade (Utility) Fixtures

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Suggestions

• Explain the situation to the tenant and see if there is any way they can talk to the building owner to have them insure the TIB’s and charge them accordingly. Needless to say, amending the lease would be the best answer but in the absence of that modification, everything should be documented in writing.

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Suggestions

• If the first solution does not work– Send a copy of the lease to the underwriter

highlighting the area that is asking the tenant to provide insurance on the TIB’s

– Get the underwriter to acknowledge in writing that they agree that the tenant is required to insure the TIB’s

– Provide the underwriter with the values for the TIB’s

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Suggestions

– Verify that the underwriter included them in the values which is best done with a statement of values

– Have the underwriter acknowledge that the insurance under TIB’s will cover the TIB’s installed by the prior tenant

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Valuation CP 10 10

e. Tenant's Improvements and Betterments at:

(1)Actual cash value of the lost or damaged property if you make

repairs promptly. (2) A proportion of your original cost if you do not make repairs promptly.

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Valuation CP 10 10

We will determine the proportionate value as follows: (a) Multiply the original cost by the number of days from the loss or damage to the expiration of the lease; and (b) Divide the amount determined in (a) above by the number of days from the installation of improvements to the expiration of the lease. If your lease contains a renewal option, the expiration of the renewal option period will replace the expiration of the lease in this procedure. (3) Nothing if others pay for repairs or replacement

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Causes of Loss

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Tenants Improvements & Betterments

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How about Legal Liability Coverage Form (CP 00 40• Tenant (leasee) is “legally liable to

insure”– We will pay those sums that you become

legally obligated to pay as damages because of direct physical loss or damage,

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Legal Liability Form with Special Cause of Loss form CP 1030• C. Legal Liability Coverage From

– The following additional exclusions apply to insurance under this Coverage Form:

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Legal Liability Form with Special Cause of Loss form CP 1030(a) Contractual Liability We will not defend any claim or "suit", or pay damages that you are legally liable to pay, solely by reason of your assumption of liability in a contract or agreement. But this exclusion does not apply to a written lease agreement in which you have assumed liability for building damage resulting from an actual or attempted burglary or robbery, provided that:

(i) Your assumption of liability was executed prior to the accident; and (ii)The building is Covered Property under this Coverage Form.

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What if the tenant had NO damage on their TIB’s

• No damage to most of the building

• Building closed for over a year

• Businesses moved out• Businesses lost their

lease• Businesses lost the

value of the TIB

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Solution

• No Damage• Lost Lease• Solution: Leasehold Interest Insurance

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Check List

• Check lease to determine which party is required to insure the TIB’s

• Check lease to determine if the leasee is required to insure and other “building” items that the lessor installed such as air conditioning

• Check lease to determine who must repair or replace TIB (often found under the Maintenance Agreement

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Check List

• Check lease to determine specific requirements as relates TIB/Building items– Company rating– Admitted– Deductible– Valuation– Perils– Amount of coverage

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Check List

• Consider insuring TIBs under the building definition

• If insuring TIB’s under Your Business Personal Property include the Separation of Coverage Endorsement

• Note that many TIBs are subject to ordinance or law when rebuilding

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Check List

• Make sure building owners report when tenants leave so coverage can be increased

• Make sure building owners report if a tenant leaves and the building/space is vacant

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Upcoming Classes2/20 Certificates and Additional Insureds

2/26 & 27

Ethics, Privacy and Compliance

3/4 Annuities

3/6 Personal Auto – 5 Key Issues

Documents

Insurance Community University Tenants Improvements and Betterments and Insurance 1 The webinar will begin shortly. There is no audio at this time