The subject of this discussion is the improvements and betterments insuring agreement in forms covering residential risks. This supplementary coverage is sometimes also known as Building Additions and Alterations or Improvements, Alterations and Additions.

Topics covered:

Residential risks

Coverage under dwelling forms

Cooperative apartments

Condominium unit owners

 Residential Risks

 Insurance Services Office (ISO) form HO 00 04 05 11 of the current homeowners program offers building additions and alterations insurance as an additional coverage. The form provides that building improvements or installations made or acquired at the expense of the insured to that part of the residence premises used exclusively by the insured are covered. Earlier forms covered building additions, alterations, fixtures, improvements or installations made (not acquired) by the insured. In situations where improvements are sold to a new tenant by a departing tenant (such as cooperative apartments or rental apartments under rent control in a tight housing market), inclusion of improvements acquired becomes significant. The American Association of Insurance Services (AAIS) form HO 0004 09 08 also provides coverage for made or acquired improvements and betterments. The Mutual Service Office (MSO) form MHO 6 07 07 MHO 6 07 07 has additions and alterations included in the coverage C limit. In the ISO and AAIS forms, the limit of liability for tenants is 10 percent of the limit for unscheduled personal property (coverage C). The MSO form does not have a percentage and simply includes coverage within the general coverage C limit. For improvements and installations values in excess of this limit, additional coverage for tenants can be purchased by endorsement (ISO's endorsement is HO 04 51 10 00; the AAIS endorsement is HO 2530 01 06). MSO does not have an endorsement for increasing limits. In the ISO and AAIS forms it is an additional amount of insurance that the insured can specify. Therefore, if the insured spent $25,000 on parquet floors and a custom bath, the insured can add coverage for those alterations.

 Some insureds under homeowners policies covering owned dwellings also need improvements and betterments coverage. The usual case involves a second residence rented to the insured where improvements have been made at the insured's expense. For example, an insured has a long-term lease on a summer cottage and adds built-in bookcases, a kitchen island, and loft. There are endorsements that would cover the property. The ISO endorsement is HO 04 49 and the AAIS is HO 6245. The amount of coverage is scheduled, and the location of the property is indicated.

 Ordinance or law coverage applies to the improvements or additions and alterations. ISO, AAIS, and MSO allow 10 percent of the limit that applies to the additions and alterations. For example, if an insured carries $50,000 coverage C, then 10 percent of this amount applies to additions and alterations, or $5,000, and 10 percent of this amount—the amount available for ordinance or law coverage—is $500. The insured can purchase additional amounts of ordinance or law coverage by attaching AAIS HO 2557 or ISO 04 77. MSO provides no additional coverage. Again, the insured is allowed to determine the amount of coverage for the additions and alterations.

 Coverage under Dwelling Forms

 Improvements, alterations, and additions insurance is provided as a supplementary coverage under the ISO DP forms of the dwelling policy program. A named insured who is a tenant of the described location may apply 10 percent of the coverage C limit of liability to improvements, alterations, or additions damaged by an insured peril. The improvements, alterations, or additions must have been made or acquired at the named insured's expense to the portion of the premises occupied by the named insured.

 In form DP 00 01 07 14, this coverage is included in—that is, is not in addition to—the limit of liability for coverage C; in forms DP 00 02 07 14 and DP 00 03 07 14, it is in addition to the available limit of liability for coverage C. If the amount of insurance payable through this extension is not adequate, an additional amount can be arranged using endorsement DP 04 31 12 02.

 The AAIS forms are similar, except that in the basic form the 10 percent is in addition to the coverage C limit. Additional coverage for tenants improvements may be purchased by adding endorsement FL-30. As in the ISO forms, the insured is allowed to specify the amount of coverage available to the property. MSO does not provide anything specific in the dwelling forms.

 Cooperative Apartments

 A different problem confronts the occupant of a cooperative apartment. Here the apartment building or complex is owned by the occupants collectively or by the cooperative association (usually a corporation), of which all occupants are members or stockholders. In the event that the association's insurance on the building does not fully cover improvements to the building made or paid for by the individual occupant, coverage is available under the occupant's dwelling or homeowners policy. It applies in place of, or as excess over, the association's coverage. The occupant's coverage is within the improvements and betterments or building additions and alterations supplemental coverages of the dwelling forms or homeowners form HO 00 04 or HO 0004.

 ISO form HO 00 06 05 11 or AAIS form HO 0006 or MSO form MHO 6 may be used to insure occupants of cooperative apartments as well as condominium unit owners. In these forms, alterations, fixtures, and improvements are automatically insured under coverage A (dwelling). The ISO homeowners manual rules state that a limit of $5,000 is provided for named perils protection for all items under coverage A. The AAIS form provides 10 percent of the coverage C amount. The amount of coverage can be increased, if needed, in both programs, and named peril coverage can be changed to open perils coverage.

 An important difference between an occupant of a cooperative and a tenant of a rental apartment is in the period of the lease. In a cooperative, the lease is continuous and is usually not cancelable by loss (unless the entire cooperative is dissolved), whereas the typical rental lease runs for a specific period of time and usually is subject to cancellation in the event of severe damage to the premises.

 This has an important effect on valuation of the improvements. With the occupant of the cooperative, the use value of improvements is not amortized over the term of a lease as is done with rental leases. So in the event that the improvements are not restored after loss, the loss is treated as any other property loss.

 Before giving insurance advice, it is vital to check the exact ownership arrangement of the cooperative apartment and the provisions pertaining to restoration and insurance of the occupant's improvements. Are they covered by the association's insurance, or must the occupant replace (and insure) them? If improvements made by a previous occupant are sold to the new occupant, the current value of these improvements, if not covered by the association's insurance, should be insured by the tenant.

 Only the actual physical value of improvements acquired from a previous occupant should be used for purposes of setting insurance limits. Purchase of a cooperative apartment often involves payment to acquire a favorable lease as well as the physical improvements. If the value of the lease is substantial and the premises might not be rebuilt after loss, separate leasehold interest insurance can be provided to cover this exposure. See Leasehold Interest Coverage.

 Condominium Unit Owners

 Under the ISO program, form HO 00 06 is used to cover condominium unit owners. As noted, the AAIS form is HO 0006, and the MSO form is MHO 6, and provides coverage under coverage C. The forms provide coverage for appliances, fixtures, alterations, and improvements (the AAIS form includes “decorations”) that are part of the building under coverage A (dwelling). Coverage A also protects (1) items of real property that pertain exclusively to the residence premises; (2) property that the insured has the responsibility to insure by agreement with the association or corporation; and (3) structures owned by the named insured, other than the unit, at the unit's location. ISO rules state that $5,000 of coverage is provided for named perils protection on coverage A property, but this limit may be increased. Endorsement HO 17 32 05 11 is used to change from named perils to open perils coverage.

 The AAIS program coverage limit for all building items (including alterations and improvements) is ten percent of the coverage C limit, unless the insured selects an optional higher limit. In the AAIS program, the endorsement to change named perils to open perils coverage is HO 7032.

 Both forms provide ordinance or law coverage for the additions and alterations. The MSO form provides coverage under the general coverage C limit and covers additions, alterations, decorations, fixtures, and other improvements made or acquired at the insured's expense that are part of the structure and are within the unit.

 Both ISO and AAIS forms' loss settlement condition raises a question about what the insured is entitled to if the property is repaired or replaced, but not within a reasonable time of the loss. If the property is repaired or replaced within a reasonable time of the loss, the insured is entitled to replacement cost coverage. The current versions state that the insured will receive settlement on an actual cash value basis if the damage is not repaired or replaced. There is no reference to a time limitation. Insureds may be able to argue that they are entitled to replacement cost coverage if they repair or replace the property at any time. Note that form HO 00 06 does not contain the time limitation found in forms HO 00 02 05 11 and HO 00 03 05 11 that allows the insured to recover immediately on an ACV basis and then claim the balance due under replacement cost within 180 days of loss. The HO 00 06 allows for the actual cost to repair or replace as long as the property is repaired or replaced within a reasonable time; what exactly constitutes a reasonable time is left open to interpretation.

 The MSO form uses two different forms, so the loss provisions are the same as for a homeowner's form. The insured must repair or replace the property in order to receive replacement cost coverage. They insured may claim actual cash value coverage and then change to replacement cost coverage as long as the claim for replacement cost is no later than 180 following settlement at acv. However the repair or replacement must be completed before the claim is made.

 The unit owner's need for insurance may extend beyond merely improvements and betterments coverage, or the unit owner's protection may be insured entirely by the association's coverage. To determine what and how much coverage on building items the unit owner needs, the extent of the association's insurance responsibility must be established. Then the unit owner's insurance can be arranged to cover whatever is not insured by the association's policy. This requires knowledge of the association's responsibility, as set out in the condominium declaration—the ownership document for condominiums—or the bylaws or other management records of the condominium association. These requirements are by no means standardized. Considerable variation will be found, although a few typical patterns prevail. Also, sometimes property ownership and the obligation to insure do not coincide.

 In some cases, the association is made responsible for insuring on behalf of the unit owners all building items, whether owned by the unit owners in common or individually, including additions made by individual owners to their own units. In other cases the units as originally designed are to be insured by the association, but unit owners must insure their own additions—and sometimes even additions made by previous owners.

 Another common arrangement is the bare walls provision. Under this arrangement, the association insures the common property and the perimeter (outer) walls, floor, and ceiling of the units up to the unfinished interior surface (bare walls); the unit owner is responsible for maintaining and insuring the interior, including not only unit owners' additions but the entire interior portion of the unit, paint or wallpaper on the outer walls and ceiling, floor tile or carpeting, and interior partitions, wiring, plumbing, and fixtures. Exterior additions made by unit owners may, or may not, be covered by the association insurance under a bare walls arrangement. The bare walls provision can obviously result in a substantial value to be insured by the unit owner.

 Another requirement that may cause a problem is replacement of exterior glass, frequently the responsibility of the unit owner even though outside the interior surface of the bare walls. Coverage for breakage of building glass is currently provided as an additional coverage within the limit for coverage A property. If not considered part of the insured's unit, exterior windows are nonetheless covered property (for named perils or breakage) if they (1) pertain exclusively to the unit or, (2) are property that the insured has the obligation to insure by agreement with the corporation or association. This is additional coverage 9 on the ISO form and 7 on the AAIS form.

 The basic unit owners' additions and alterations coverage provided by the various policies available for condominium unit owners will frequently require modification to meet the particular needs of the individual unit owner.