If the insured tenant pays for repairs and is not reimbursed by the landlord, the tenant’s policy pays for the actual cash value of the damaged property. The policy requires that repairs be made promptly, 6 but the form does not define promptly. Depending on the circumstances, e.g., the availability of parts or workers to do the job, “promptly” can be a relative term and 60 days, 90 days, or even six months or more could be considered promptly in the absence of a policy definition.
If others (e.g., the landlord) pay for the repairs, the tenant’s policy owes nothing. In this situation, the tenant has not suffered a loss. If the insured sustains a loss of income while the property is being repaired, business income coverage — provided the insured carries that coverage — should respond.
If repairs are not made promptly, the tenant recovers a portion of the original cost of the damaged property.
This last method can be the most challenging. When repairs are not made promptly, or the improvements are destroyed and not replaced, the policy pays what can be described as the unamortized portion of the original cost or investment in the improvement.
When the insured or landlord does not promptly repair or replace the improvements, the basis for recovery is the original cost of the improvements, including the cost to prepare the space before the improvements can be installed. Depreciation is not relevant. Neither does it matter if the improvements would cost more or less to replace than they cost to install. Actual cost of the installation is the insured tenant’s investment and that is what has been lost when improvements are not replaced. 7
The policy states that if the insured does not make repairs promptly, the loss will be valued at a proportion of the original cost as follows:
“Multiply the original cost by the number of days from the loss to the expiration of the lease, and divide that amount by the number of days from the installation of improvements to the expiration of the lease.” 8