The company is now denying the claim based upon the tenant having no insurable interest in the improvement and betterment. The lease is an annual renewable lease. There is nothing in the lease that addresses the ownership of improvements and betterments. The lease was first executed in 1990 and renews automatically unless one party notifies the other within a certain time prior to the end of the annual period.

The company is stating that when any lease renews, all improvements and betterments then belong to the building owner. In other words, a tenant only has an insurable interest for the period of the lease, in this case one year.

Is this correct?

Illinois Subscriber

A

The commercial property policy promises to cover the insured's “use interest” in the improvements and betterments he has made to the building. That use interest exists as long as any lease is in force. But if the lease contains an option to renew, then in the commercial property form the use interest extends to the end of the option period. In your insured's case, since the lease renews automatically, the use interest continues until the lease is finally terminated by either party.

The valuation section of the policy promises to pay actual cash value (ACV) for the damage to the improvements and betterments, if the insured makes the repairs “promptly.” If he does not make them promptly, the policy sets out a two-step formula for calculating the amount to be paid:

First, multiply the original cost by the number of days from the loss or damage to the expiration of the lease; and, second, divide the amount determined in (1) by the number of days from the installation of improvements to the expiration of the lease.

This formula, in effect, defines the length of the insured's use interest as the length of his lease. If the lease has a renewal option, the insured's use interest extends to the end of that option.

Let's say a tenant installs $10,000 of improvements and betterments on the thirtieth day of his one-year lease. On day sixty, a fire destroys the improvements. If he doesn't make repairs promptly, the amount payable to him is figured as follows:

1. $10,000 times 305 (number of days from time of loss until expiration of the lease) = $3,050,000.

2. $3,050,000 divided by 335 (number of days from installation until expiration of the lease) = $9,104 payment.

If the lease contains an option for a one-year renewal, the loss is figured as follows:

1. $10,000 times 670 (number of days from time of loss until expiration of the lease renewal option) = $6,700,000.

2. $6,700,000 divided by 1000  (number of days from installation until the expiration of the option) = $6,700 payment.