Misunderstood Property Ins. Issues (Part 2)
Page 5 of 7
Click here for course instructions Click here to exit the course




Tenant improvements and betterments: direct damage

Let's take a look at the following scenarios. A 5-year lease with a 5-year renewal is defined as a "10-year lease", and the covered property loss occurs at the end of the 5th year.
1. If the Evaluation Base is left at actual cost value (ACV) and the Insured DOES REPLACE:
  • The ACV is $80,000
  • The settlement is for an $80,000 recovery

    2. If the Evaluation Base is left at ACV and the Insured DOES NOT REPLACE:
  • Recovery is a percentage of the original cost
  • 50% of $100,000 = $50,000 recovery
    3. If the Evaluation Base is changed to Replacement Cost and the Insured DOES REPLACE:
  • Recovery is 100% of the Replacement Cost at the time of loss or $100,000 recovery

    4. If the Evaluation Base is changed to Replacement Cost and the Insured DOES NOT REPLACE:
  • Recovery is a percentage of the original cost
  • 50% of $100,000 = $50,000 recovery

    Obligations to insure
    Purchasing Building Coverage on the tenant's policy activates the "building" definition and allows for a lower rate.

    Legal Liability Coverage is also something that should be purchased.

    If the tenant has signed a triple net lease obligating then to provide coverage on the building, then the tenants improvements and betterments can be insured under the building item. The policy has to be clarified with the additional covered property endorsement to separate out interests.

    If a check is issued in both the names of the owner and the tenant, the tenant loses control. The tenant may not be able to take insurance proceeds to replacement of the building in the absence of a Repair and Replace Clause in the lease.

    Pertinent definitions in lease
    "Improvements and alterations" are property installed to benefit the tenant. Improvements and alterations revert to the lessor (the party that provides the lease) upon lease termination unless indicated otherwise in the lease.

    "Trade fixtures" are sometimes referred to as "utility fixtures". They are property items to be removed by tenant upon lease termination.

    		•
    Next Page >

     

    © Copyright CEfreedom.com and Insurance Skills Center. All Rights Reserved.
    Not only are policy forms, clauses, rules and court decisions constantly changing, but forms vary from company to company and state to state. This material is intended as a general guideline and might not apply to a specific situation. The authors, LunchTimeCE, Inc., CEfreedom, and Insurance Skills Center, and any organization for whom this course is administered will have neither liability nor responsibility to any person or entity with respect to any loss or damage alleged to be caused directly or indirectly as a result of information contained in this course.