Understanding Improvements and Betterments: Be Mindful of Lease and Insurance Provisions


Prem. No. Bldg. No. Coverage Insurance Limit Causes of Loss Coinsurance Rates

001 001 Building 5,000,000 Special 80% (See Sched.)

Your Bus. Per. Prop. 1,000,000 Broad 80%

Per. Prop. Of Others 100,000 Broad 80%

Bus. Income & Extra Expense 500,000 Special 80%

The landlord’s interest in improvements and betterments is covered under the landlord’s building coverage. It is important that the insurance limit for building coverage include the value of any improvements that the tenant has made to the property. Why? Because failing to add such value to the insurance limit may subject the landlord to a coinsurance penalty.

The declarations page of a tenant’s policy will not show a limit for building coverage because the tenant does not own the building. It will indicate whether the insured tenant selected coverage for improvements and betterments by the entry of a limit of insurance under the Business Personal Property category. If there is no entry, coverage for the tenant will not apply.

Generally, the landlord carries insurance on the building, including their interest in improvements and betterments, while the tenant covers their use interest in the improvements — and may wish to include coverage for personal property of others and loss of business income.

Trade Fixtures v. Improvements

Improvements and betterments ordinarily become the property of the landlord, and the tenant, who paid for them, cannot legally remove them. Trade fixtures, however, are handled differently. You will not find a definition of trade fixtures in the insurance policy. Generally, a trade fixture is a fixture that is installed by the tenant, sometimes as a moveable fixture while other times as a built-in which becomes part of the building. The tenant has the right — and sometimes the duty — to remove trade fixtures when the lease expires or the building is vacated. In many cases, whether an item is a trade fixture or improvement or betterment will be clarified in the lease. But not always. In some cases, whether an object is a trade fixture or improvement will be determined by trade customs in a particular jurisdiction. Some leases make a distinction between tenant’s improvements and tenant’s property, the latter referring to trade fixtures. A tenant’s trade fixtures are covered as furniture and fixtures in item (1) under Your Business Personal Property shown earlier. 3

Trade fixtures retain the character of personal property. Using a store as an example, a new front...