Irene Morrill, CPCU, CIC, ARM, CRM, CRIS, LIA, CPIW Vice President of Technical Affairs

Transcription

1 TECH TALK Commercial Tenants, Landlords and Improvements and Betterments Irene Morrill, CPCU, CIC, ARM, CRM, CRIS, LIA, CPIW Vice President of Technical Affairs Who insures tenant improvements and betterments? Your client is a tenant in a strip mall owned by some other commercial entity. Your client has a long term lease and is adding almost half a million of improvements and betterments to create just the right atmosphere and ambiance to attract customers. The landlord doesn t care and doesn t want to be responsible for these tenant improvements and betterments (I&B). The tenant obviously wants to insure the value. How are the respective policies set up to ensure that both clients are properly covered for property losses? The Tenant and I&B The tenant should CERTAINLY review the lease. Often the landlord could care less about covering and/or maintaining the value of the tenant improvements and betterments. HOWEVER, the landlord needs to address the commercial policy to make sure that the value of tenant I&B doesn t interfere with payment of building losses that ARE important to the landlord. The tenant must review its commercial policy to verify that these values ARE covered and on what loss payment basis. Landlord s Commercial Policy The CP Building and Business Personal Property Coverage Form defines building as a. Building, meaning the building or structure described in the Declarations, including: (1) Completed additions; (2) Fixtures, including outdoor fixtures; (3) Permanently installed: (a) Machinery; and (b) Equipment; There is more to the definition but for our purposes it doesn t matter. If the tenant has attached its I&B to the landlord s building, then the value of the tenant I&B becomes part of the building value which is subject to the co-insurance clause. Massachusetts Association of Insurance Agents 91 Cedar Street - Milford, MA TECH Hotline * * * (FAX)

2 2 If the landlord is insured under an ISO BOP any edition the definition of building reads essentially the same: Covered Property includes Buildings as described under Paragraph a. below, Business Personal Property as described under Paragraph b. below, or both, depending on whether a Limit of Insurance is shown in the Declarations for that type of property. Regardless of whether coverage is shown in the Declarations for Buildings, Business Personal Property, or both, there is no coverage for property described under Paragraph 2. Property Not Covered. a. Buildings, meaning the buildings and structures at the premises described in the Declarations, including: (1) Completed additions; (2) Fixtures, including outdoor fixtures; (3) Permanently installed: (a) Machinery; and (b) Equipment;. The ISO BOP does not have a co-insurance clause, but since the 1999 edition of the ISO BOP, there has been an insurance to value provision that penalizes loss payment if 80% of the covered property value has not been insured. The Tenant s Commercial Policy: The ISO Building and Business Personal Property Coverage Form CP defines business personal property as: b. Your Business Personal Property consists of the following property located in or on the building or structure described in the Declarations or in the open (or in a vehicle) within 100 feet of the building or structure or within 100 feet of the premises described in the Declarations, whichever distance is greater: (1) Furniture and fixtures; (2) Machinery and equipment; (3) Stock ; (4) All other personal property owned by you and used in your business; (5) Labor, materials or services furnished or arranged by you on personal property of others; (6) 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; The ISO BOP form - any edition - defines business personal property as: Covered Property includes Buildings as described under Paragraph a. below, Business Personal Property as described under Paragraph b. below, or both, depending on whether a Limit of Insurance is shown in the Declarations for that type of property. Regardless of whether coverage is shown in the Declarations for Buildings, Business Personal Property, or both, there is no coverage for property described under Paragraph 2. Property Not Covered. b. Business Personal Property located in or on the buildings or structures at the described premises or in the open (or in a vehicle) within 100 feet of the buildings or structures or within 100 feet of the premises described in the Declarations, whichever distance is greater, including: (1) Property you own that is used in your business; (2) Property of others that is in your care, custody or control, except as otherwise provided in Loss Payment Property Loss Condition Paragraph E.5.d.(3)(b);

3 (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; 3 Again, the CP Building and Business Personal Property Coverage Form is subject to a co-insurance provision penalizing losses on covered property if it is not insured to a certain % of value. The ISO BOP Coverage form penalizes loss payments on covered property if not insured to 80% of value. Coinsurance Penalty CP Building losses for the landlord WILL be penalized even if the lease contract states the landlord is not responsible for insuring the tenant I&B. ALL building losses can be penalized even though the landlord doesn t want to cover the tenant I&B due to the definition of building as covered property. Definitions can be dangerous critters! The CP Building and Business Personal Property coverage form states: Instead, we will determine the most we will pay using the following steps: (1) Multiply the value of Covered Property at the time of loss by the Coinsurance percentage; (2) Divide the Limit of Insurance of the property by the figure determined in Step (1); (3) Multiply the total amount of loss, before the application of any deductible, by the figure determined in Step (2); and (4) Subtract the deductible from the figure determined in Step (3). We will pay the amount determined in Step (4) or the Limit of Insurance, whichever is less. For the remainder, you will either have to rely on other insurance or absorb the loss yourself. The building coverage limit MUST include the tenant I&B that is attached to the building or even a loss to the landlord s roof loss will be penalized! The tenant must consider ALL the values under Business Personal Property in the assigned limit in order to meet the required % of BPP or all losses will be penalized. Per policy language, BOTH the landlord AND the tenant are required to cover these values or a loss settlement penalty will be applied to any building or BPP loss regardless of whether loss to the I&B is involved! Adding insult to injury is a provision applicable to the tenant alone. Even though the tenant is required to include I&B in the BPP limit in order to avoid co-insurance, the tenant s policy won t pay IF the I&B is replaced by someone else! (3) Nothing if others pay for repairs or replacement. CP solution for landlord or tenant to avoid unwanted values 1) Optional Coverage Agreed value option as it removes the co-insurance provision G. Optional Coverages If shown as applicable in the Declarations, the following Optional Coverages apply separately to each item: 1. Agreed Value a. The Additional Condition, Coinsurance, does not apply to Covered Property to which this Optional Coverage Coverage applies. We will pay no more for loss of or damage to that property than the proportion that the Limit of Insurance under this Coverage Part for the property bears to the Agreed Value shown for it in the Declarations.

4 4 2) Building owner and/or tenant could use the Additional Property NOT Covered Endorsement CP to remove certain values from the definition of building or business personal property when the co-insurance provision still applies. Avoiding a loss settlement provision under the BOP The only way to avoid a loss settlement penalty would be to 1) Get a statement in writing from the underwriter that the building and/or BPP value does Or does not cover the tenant I&B (depending on the desires of the insured) and that there will be no insurance to value penalty for any loss situation 2) Add the Removal of Insurance-To-Value Provision endorsement BP 04 83

5 In a future Tech Talk we will discuss how to cover the value of the tenant I&B investment when it is NOT damaged but the building housing it is and the lease contract has been suspended and forced the tenant to vacate without the I&B. 5 * * * * * Good Luck. If I can be of service to you, please call me, Irene Morrill, Vice President of Technical Affairs, at or me at imorrill@massagent.com. This article has been developed expressly for the members of MAIA. Reprint by other than members without the express permission of the author is not permitted.