1. Tenants Improvements and Betterments and Insurance
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10. Disclaimer
Insurance 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

11. Your Instructor Today
Laurie Infantino, CIC, AFIS, CISC, ACSR, CISC, CRIS
President and Co-Founder of
The Insurance Community Center

12. 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.
What constitutes Tenants Improvements and Betterments; Alterations; Personality; Trade Fixtures
Overview of the challenges in insuring TIB’s
Lease Review
Policy Review for insuring TIB’s

13. Polling Question #1

14. 1) What constitutes Tenants Improvements and Betterments; Alterations; Personality and Trade Fixtures?

15. 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.

16. Alterations and Personality
Sometimes referred to as “alterations”
Could include “trade” fixtures or stylist improvements sometimes referred to as “personality”

17. Alterations and Personality
Stylistic to the branding of the operation

18. Trade Fixtures
Trade fixtures may be removable at the lease termination (refer to lease)
Property items to be removed by tenant upon lease termination

19. Polling Question #2

20. 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

21. 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

22. 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

23. 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.

24. Lease Review

25. Polling Question #3

26. 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

27. Lease Basics Lease language Lease review by insurance brokers
Often archaic and “boilerplate” wording
Legal perspective only – not risk driven
Lease review by insurance brokers
Terms used can be confusing
Terms used by attorneys often do not match with insurance terms
Clients often do not read the language before signing

28. 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.

29. Air Conditioning http://www. propertycasualty360
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.

30. Air Conditioning http://www. propertycasualty360
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.

31. Lease Review Sections as relates lease
INSURANCE
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….

32. Lease Review Sections as relates lease
INSURANCE
Policy Form of Tenant’s Insurance and Limits
100% of replacement cost
Against Direct Physical Loss
Deductible not to exceed $1, 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

33. 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”.

34. 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.

35. Policy Review

36. Insurance Issues/Insurance Solutions
Building Owners Installs the TIB’s and does not require Leasee to Insure
Include in Building Owner Building Insurance
Insure as part of the Building Limit
Building Definition
Building, meaning the structure defined in the declarations including:
Completed Additions
Fixtures, including Outdoor Fixtures
Permanently installed machinery and equipment

37. Insurance Issues/Insurance Solutions
Building Owners Owns the TIB’s Upon Termination of the leasees lease
Include in Building Owner Building Insurance
Insure as part of the Building Limit (increase amount of insurance
Building Definition
Make Certain the Building Owner reports to you every time a tenant leaves so that the Building Amount can be increased. If they do not, they will have insufficient limits and potentially suffer a coinsurance penalty.

38. Insurance Issues/Insurance Solutions
Building Definition
Your Business Personal Property located in or on the building described in the Declarations or in the open (or in a vehicle) within 100 feet of the described premises, consisting of the following unless otherwise specified in the Declarations or on the Your Business Personal Property – Separation of Coverage form
Tenant Installs the TIB’s at their own expense
Include in Business Personal Property limit
OR activate the Building Coverage

39. 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

40. Insurance Issues/Insurance Solutions
Building Definition
Your use interest as tenant in 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;
Tenant Installs the TIB’s at their own expense
Include in Business Personal Property limit
OR activate the Building Coverage

41. 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;

42. 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

43. 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.

44. 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.

45. 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.

46. 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?????

47. Trade (Utility) Fixtures
These items are NOT other types of BPP
Manuscript language to policy
These are NOT covered by TIB language in the policy
Property that can be removed upon lease termination

48. Insurance Issues/Insurance Solutions
1. There is the contractual requirement to insure; however the policy language does not allow for this to be covered under TIB
2. There is a good chance this claim WILL be DENIED even if the amount is included in the policy
Tenant does NOT install or pay for TIB’s BUT tenant is required to insure in lease
Owner Installed
Prior Tenant Installed

49. 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.

50. 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

51. 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

52. 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.

53. 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

54. Causes of Loss Are “perils” specified? Fire, EC All risk Special form
Lessor AND lessee should ALWAYS have Equipment Breakdown coverage

55. Tenants Improvements & Betterments
Ownership
Responsibility
Who installed the TIBs
Who is responsible to repair/insure
Insuring TIB
Automatically BPP
Add Separation of Coverage
Building Ordinance
Insure TIB for Building Ordinance
Insure BO on Business Income

56. 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,

57. 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:

58. 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.

59. 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

60. Solution
No Damage
Lost Lease
Solution: Leasehold Interest Insurance

61. 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

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

63. 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

64. 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

65. Upcoming Classes 2/20 Certificates and Additional Insureds 2/26 & 27
Ethics, Privacy and Compliance
3/4
Annuities
3/6
Personal Auto – 5 Key Issues
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