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Question: I have a client who is a condo tenant, and has renter's insurance. The client has put in new curtains, wood flooring over the existing tile in one room, and wall-to-wall carpet in another room.

There was a water leak from a unit above that damaged the unit my client is renting. The adjuster for their renter's policy is making payment for their curtains and carpeting, but is saying that since the wood floor cannot be removed without destroying it, then it is structure and not contents and so they are denying that portion of their claim. 

I am wondering whether this is correct. And, what is the criteria for classifying structural damage vs. personal property damage?     

— Hawaii Subscriber

Answer: Your client has a tenants' policy, and not a home or condo policy. The tenants' policy (HO 00 04) provides coverage for contents, with 10% of the coverage C limit for building improvements or installments made at the insured's expense. There is no definition of such or limitations that the property must be removable, so unless the replacement of the carpet exceeds the limit, there should be coverage. The wood floor is part of the residence and not part of the tenant's property, and therefore is not covered.

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Updates to rented commercial space

Question: If a tenant makes improvements and betterments in a rental office unit, can the tenant insure them as tenant's improvements and betterments under form CP 00 10, Building and Personal Property Coverage Form.

The tenant does not own the improvements but has use interest in the improvements. The improvements belong to the building owner. If the lease requires the tenant to insure the improvements, does the building owner increase the building value based on the cost of the improvements immediately or does the building owner increase the building value when the tenant's lease expires and the ownership of the improvements and betterments reverts to the landlord?

— Hawaii Subscriber

Answer: It really depends on what the tenant is required to insure. If he is only to insure his use interest, the building owner should increase the building value on the cost of improvements immediately. If the tenant is required to insure the improvements and betterments themselves, either the building owner should increase the building limits and be reimbursed by the tenant, or the tenant should find a way to obtain building coverage, in which case the building owner would not need to increase the building value until the improvements and betterments revert to him.

Related: 15 top renters' insurance companies, based on customer satisfaction

Condominium policy provisions

Question: When a condo owner makes improvements to the condo, for example new kitchen cabinets, and later sells the condo, are the cabinets still betterments and improvements for the new owner who purchases the condo? 

— Ohio Subscriber

Answer: The condo policy does not define “improvements and betterments.” The policy provides coverage for betterments and alterations. While the new owner did not make the alterations, they are still alterations all the same. Also, the state statutes determine whether the unit owner or the condo association is responsible for appliances and cabinets. In our opinion the alterations still count as alterations under the new owner and should be insured as such.

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Confusing policy language

Question: I have some questions regarding the application of the language in the standard CP 00 10 in the valuation section regarding tenants improvements and betterments. Specifically, the language in section (2) regarding a proportion of your original costs if you do not make repairs promptly, and (3) nothing if others pay for repairs or replacement.

First, does the valuation section apply only to the landlord's interest in the improvements and betterments, or does this language apply to both the landlord and tenant?

There is a difference if repairs are promptly made or not. Who determines if they are prompt? If the carrier slows the process with an investigation, does that reduce the recovery for failure to promptly repair?

Also, let's assume that a tenant paid $100,000 for tenant improvements and five years into a ten year lease there is a total loss by fire. If the tenant does not rebuild, is he entitled to the full value of the improvements and betterments for which he paid? If not, and the amount is prorated, it would seem an unjust result since he paid for the improvements and for insurance on the improvements.

The improvements become the property of the landlord upon installation. On the day after installation (one month into the lease) there is a total fire loss, and the landlord decides not to rebuild but makes claim and is paid under its policy for the improvements and betterments. The tenant wants to rebuild in a new location. Does section 3, which provides “nothing if others pay” prevent the tenant from being paid since the landlord was paid, or does that language apply only if the landlord uses the money to replace the damaged improvements and betterments?

— Michigan Subscriber

Related: 6 things you need to know about insuring a condo — before buying

Answer: Regarding your first question, the improvements and betterments valuation applies to the tenant. For the building owner, the improvements and betterments become part of the building, so their value would be part of the building's value.

“Prompt” is not a defined term in the policy. Usually the equally vague “it must be repaired within a reasonable amount of time” explanation is given. In a situation where the insurer holds up the repairs or other barriers exist such as lack of building materials available when a storm does widespread damage to an area, that will factor in to what is reasonable. Basically, again with a vague phrase, the repairs should be made as soon as possible in order for them to be considered prompt.

When tenants make improvements and betterments, they are in effect buying the use of those improvements and betterments because the improvements and betterments themselves become part of the building. So, in your example, the tenant paid $100,000 for the use of the improvements and betterments. After five years, the tenant has used up half of its use interest or lost half of its investment. If the improvements and betterments are never repaired or replaced, then the tenant is entitled only to its remaining use interest.

If the landlord decides not to rebuild and is paid for the improvements and betterments under building coverage, section (3) does not prevent coverage for the tenant. That section applies only if the landlord (or someone else) actually pays for the repair and replacement of the improvements and betterments. If someone else pays and replaces the improvements and betterments, the tenant cannot recover because it does not have a loss as the improvements and betterments were replaced at no expense to the tenant.

Tenant coverage after water damage

Question: Water damaged a commercial building that is being rented to a tenant. The water damaged the old part of the building and the tenant's improvements and betterments. 

What policy pays for the building damages (that the tenant never altered) and the building damages to the tenant's improvements and betterments?

I say the landlord's building coverage pays for any building damages that are not the tenant's improvements and betterments and the tenant's business personal property coverage pays for the damages to the building improvements and betterments. Do you agree?

— Ohio Subscriber

Answer: The tenant is entitled only to its use interest in the improvements and betterments if they were made at the tenant's expense but cannot be removed because they have been made part of the building or structure. The building owner's insurance pays for the actual damage to the building, including the improvements and betterments that are part of the building, unless the tenant was required by the lease or another agreement to insure the improvements and betterments.

Related: 5 tips for claims pros inventorying water-damaged sites

Tenant's use interest explained

Question: A tenant in a building installs $1,000,000 of improvements and betterments at the tenant's expense. The CP 00 10 form provides insurance for the “use interest as tenant in improvements and betterments.” Please explain the meaning of “use interest.”

Also, what prevents the building owner from also making a claim under the building policy for loss to these improvements and betterments installed at the tenant's expense, as it appears the improvements and betterments are included in the definition of “building”?

— New York subscriber

Answer: Generally, when a tenant makes an improvement to leased property — such as adding a new store front — the actual improvement reverts to the building owner and the tenant's interest in the improvement is using it during the leased period; thus, “use interest.” Depending on who restores the improvement, the CP 00 10 provides different methods of recovery. If the tenant promptly repairs or replaces the damaged improvement, recovery is actual cash value (or replacement cost if the insured carries replacement cost coverage), as if the insured owned the improvement. If the landlord pays to restore the damaged improvement, the tenant recovers nothing. If the improvement is not promptly repaired or replaced, the tenant recovers a proportion of the original cost of the improvement.

So, if the landlord actually makes the repairs, he is entitled to recover under his building policy.

See also:

Care, custody or control exclusions: disputed and misunderstood

3 risks to consider if you own rental property