(a) made a part of the building or structure you [the named insured] occupy but do not own; and

(b) you [the named insured] acquired or made at your [the named insured] expense but cannot legally remove (emphasis added).

In lay terms, improvements and betterments are substantial improvements–such as built-in partitions or a new storefront–to a building that the tenant-insured pays to have installed but cant take out when the lease is up. The operative words here, and the ones that frequently cause confusion, are “acquired or made at your expense.”

If the building owner installs the office partitions, they arent improvements and betterments, and they shouldnt be insured as business personal property. Theyre part of the building and should be insured as real property.

If the tenant pays to have them installed but cant remove them when the lease ends, they are improvements and betterments, and may be insured as business personal property.

The rub comes in when a lease states that a tenant-insured is responsible for repairing permanent interior alterations, even though he or she did not bear the cost of installation. Many FC&S subscribers dealing with a no coverage letter on what they consider an improvements and betterments claim are confronted with this type of situation.

Say, for instance, that a fire damages a leased suite of offices. The tenant is insured on a businessowners policy. The lease states that the building owner will insure the real property (the building), but it requires that the tenant be responsible for contents of its leased area, including the improvements and betterments.

The building owner already had built out the offices before they were rented, and the tenant didnt spend any money on them.

Recall that the policy defines improvements and betterments as being “acquired or made at your [named insured] expense.” Nowhere in the policy does it state that a tenant-insured may claim property insurance proceeds for improvements and betterments that she must replace but did not pay for in the first place.

Various courts have interpreted this to mean that the tenant literally must install or bear the cost of the alterations in order for them to be considered improvements and betterments for insurance purposes.

For example, the Virginia Supreme Court in U.S. Fire Ins. Co. v. Martin stated that compressors, which were built into a leased building as part of the air conditioning system, could not be considered for coverage under improvements and betterments coverage because they were not “made or acquired at the expense of the insured.”

In this case, the lease stated that the tenant, “at its sole cost and expense,” should maintain and repair the heating and ventilating system. However, since tenant Martin had not originally paid for the compressors, the improvements and betterments provision of his policy was not triggered. Since the lease stated he was responsible for them, he ended up bearing the repair costs because his policy did not cover real property.

Similarly, a Kansas court ruled that the purpose of improvements and betterments insurance was to provide insurance for damage to alterations made by a tenant in leased premises. In Ron Henry Ford, Lincoln, Mercury Inc., v. National Union Fire Insurance Co. of Pittsburgh, the Kansas appeals court stated that the insured was not entitled to payment under improvements and bettermentseven though he repaired portions of the premises destroyed by firebecause he had “made no improvements before the fire which would come within the coverage of the insurance policy.”

After going through this discussion, subscribers often bring up the issue of rent payments. Isnt paying more rent because improvements and betterments already are in place the same as acquiring them at your own expense?

I dont think so.

Some courts have dealt with this question, but the policy forms cited actually contain the words “made or acquired at your expense, exclusive of rent paid” (emphasis added).

Even when rent is not specifically excluded, I dont believe that alterations paid for by the landlordeven if they result in a higher rentqualify as “improvements and betterments” for insurance coverage purposes.

Choosing to pay higher rent because the interior is already built out is similar to paying more because the premises are closer to an interchange, in a better setting or more aesthetically pleasing. Unless the tenant has actually paid to have the improvements and betterments installed, he or she has not made or acquired them at her own expense.

If the lease states that the tenant must replace damaged alterations, he or she should insure them for what they are: real property.

The real problem seems to be that tenants think they only need insurance on their business personal property. However, a lease may dictate otherwise. And the tenant-insured may be left with a big repair bill if coverage not does adequately reflect the lease.

Diana Reitz, CPCU, AAI, is associate editor of the FC&S Bulletins and Editor of the RF&S Bulletins, published by the National Underwriter Company in Erlanger, Ky. The editors welcome comment and questions and may be reached by fax at 859-692-2293 or via e-mail at [email protected].

Reproduced from National Underwriter Edition, April 21, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.