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

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.