Misunderstood Property Ins. Issues (Part 2)

Page 6 of 7

Tenant improvements and betterments: indirect damage

Coverage for improvements and betterments under standard property forms applies only if the improvements sustain direct damage caused by an insured peril. A tenant could incur a loss if cancellation of the lease is triggered because of damage to other parts of the premises.

Improvements and Betterments coverage will protect against damage to building improvements and betterments by any insured cause of loss, but will NOT cover loss of the value of the undamaged improvements and betterments. If the building becomes un-tenantable for more than the number of days indicated on the lease abatement clause the landlord could chooses to exercise the option and cancel the lease.

To protect against this exposure, the tenant needs Leasehold Interest Insurance, which is written for the amount of the un-amortized value of the improvements and betterments.

Destruction: fire or other cause
What happens to the lease in the case of destruction of the building? Let's look at the wording on a lease:
"If said building shall be totally destroyed, this lease shall thereupon terminate. If said building or demised premises shall be damaged by fire, earthquake, or any other cause, without fault or neglect of LESSEE, so that the leased premises become un-tenantable, then, if the leased premises cannot be made tenantable within 120 working days from the date of such damage, this lease may be terminated by LESSOR; in the event the leased premises cannot be made tenantable within 180 days, this lease may be terminated by either party.

In any case where the leased premises are rendered un-tenantable by fire, earthquake, or other cause without the fault or neglect or LESSEE, then the LESSEE shall not be bound to pay rent for that period during which said premises remain un-tenantable. If the premises are rendered partially un-tenantable without the fault or neglect or LESSEE, the monthly rent payments shall be adjusted in the proportion that the rental value of the un-tenantable portion of the demised premises bears to the rental value of the whole thereof."

Leasehold Interest Coverage form
As mentioned earlier, the tenant needs Leasehold Interest Insurance to have coverage for the un-amortized value of the improvements and betterments, since Improvements and betterments coverage does not cover loss of value to undamaged improvements and betterments.

The following wording is from the Leasehold Interest Coverage form:
"C. COVERAGE
We will pay for loss of Covered Leasehold Interest you sustain due to the cancellation of your lease. The cancellation must result from direct physical loss of or damage to property at the premises described in the Declarations caused by or resulting from any Covered Cause of Loss to Improvements and Betterments, meaning the un-amortized portion of payments made by you for improvements and betterments. It does not include the value of improvements and betterments recoverable under any other insurance, but only to the extent of such other insurance."

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

"C. LIMITS OF INSURANCE
1. Applicable to Tenants' Lease Interest
a. The most we will pay for loss because of the cancellation of any one lease is your 'net leasehold interest' at the time of loss. 'Net Leasehold Interest' means the un-amortized amount shown in the Schedule. Your 'net leasehold interest' at any time is your 'monthly leasehold interest' times the number of months left in your lease."

Next Page >

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.