Tenants' Improvements Not Covered When Not Acquired or Made at Tenant's Expense

Most commercial property forms include leasehold improvements under the definition of “your business personal property.” Recently we had a carrier deny a water damage loss to leasehold improvements for an insured who was a tenant in a building on the basis that the insured did not actually pay for the leasehold improvements. The insured did not pay for the improvements when moving in to the leased space but was clearly obligated to insure the existing leasehold improvements via the lease agreement.

The carrier stated that for leasehold improvement coverage to apply, an insured must actually pay for the improvements or construct them themselves or pay the exiting tenant for them; the carrier said that this is what “you acquired” means under the definition of “leasehold improvements.”

Other carriers with whom we do business do not share the same viewpoint.

What is your position on this issue ?

Texas Subscriber

We agree with the carrier: the phrase “you acquired or made at your own expense” means that the tenant did in fact pay for the improvements, either by acquiring something–e.g., an air conditioning unit installed in the leased space that cannot be removed–or by making actual additions or installations, such as building custom shelving. We interpret “at your own expense” to modify “you acquired or made,” not just “you made.” So, acquiring by moving into a space that has already been improved by a previous tenant does not fit with this provision.

As far as the lease requiring the tenant to insure the improvements, the tenant may have to purchase building coverage to accomplish this. Some carriers won't provide building coverage for leased premises, so it can be a difficult situation.

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