Summary: The commercial property forms refer to fixtures as covered property in three places, under building (“fixtures, including outdoor fixtures”), business personal property (“furniture and fixtures”), and use interest (“improvements and betterments are fixtures”). What are fixtures? Do fixtures have different coverage needs? If fixtures are covered as part of a building, why the need to mention them separately?

This article discusses the status of fixtures in issues relating to insurance.

Topics covered:
Commercial property coverage
What are fixtures?
The legal view
Is this a fixture or personal property?

Commercial Property Coverage

The insuring agreements for building and business personal property in the ISO Building and Personal Property Coverage Form, CP 00 10 10 12, refer to fixtures in in three places: coverage a. Building states coverage applies to “the building or structure described in the Declarations, including…fixtures, including outdoor fixtures…” as well as permanently installed machinery and equipment; coverage b. Business Personal Property includes “furniture and fixtures…” and machinery, equipment, and stock. This overlap in coverage may well prove important in the event of a covered loss. The third mention is, if the insured is a tenant, under personal property coverage, which includes the insured's use interest in “improvements and betterments that are defined as fixtures, alterations, installations or additions…[m]ade a part of the building or structure you occupy but do not own; and [y]ou acquired or made at your expense but cannot legally remove.”

The fixtures referred to may be trade fixtures; that is, fixtures that are removable without permanently damaging the realty and are installed with the intent of enabling a tenant to perform a trade or profession. These items are normally held to be personal property if they can be removed without damaging the structure. However, if the insured cannot legally remove the fixtures because they have been made a part of the structure by contract, then coverage applies only to the insured's use interest; that is, the amount the insured has spent to add the items is prorated over the course of the lease for coverage purposes. Of course, if the lease has terminated or otherwise run its course, most leases require the ownership of the fixtures to automatically become the property of the owner.

An insured might own a building insured for $300,000, with coverage for $150,000 on business personal property. A tornado removes the roof of the building, and the business personal property is completely ruined. When an evaluation is carried out, it is discovered that the $150,000 is insufficient unless some fixtures previously considered personal property may, in fact, be part of the building. Such might be the case with some lighting fixtures or the modular system described in Is This a Fixture or Personal Property?, following.

When an insured leases a building in which he conducts a business, many of the fixtures he installs—such as shelving—may be considered trade fixtures that can be removed without causing damage to the structure and, therefore, personal, rather than real, property.

It is important to know whether items are covered as building or personal property so adequate coverage can be arranged. This must be determined when selling or underwriting a risk and established in the event of a claim. If the values of the fixtures are misidentified the insured may be assessed a coinsurance penalty or may find coverage is inadequate to indemnify the insured after a loss.

What Are Fixtures?

The first thing to address is what fixtures are.

In Alabama, fixtures are goods that become “so related to particular real estate that an interest in them arises under real estate law.” Ala.Code § 7–2A–309(l)(a) (1975). In re Witherington, No. 13-03775, 2014 WL 2203880 (Bkrtcy.S.D.Ala. May 27, 2014); Fla. Stat. § 679.334(4).

The term fixtures is generally used in reference to some originally personal property that has been actually or constructively affixed either to the soil itself or to some structure legally a part of the land. It has been variously defined as denoting an article that was once personal property but became real property by being physically affixed to the real property by someone having an interest in the land. When it is annexed to the land in such a manner that it cannot be removed without injury to the real property, it is a fixture. Lankhorst v. Independent Sav. Plan Co., No. 11-CV-390, 2014 WL 4101199 (M.D.Fla. Feb. 19, 2014); Posson v. Przestrzelski, 111 A.D.3d 1235 (N.Y.S.2013).

The definition of fixture, according to Webster's Collegiate Dictionary (Tenth Edition), is “2.a. something that is fixed or attached (as to a building) as a permanent appendage or as a structural part (a plumbing fixture); … c. an item of movable property so incorporated into real property that it may be regarded as legally a part of it.”

The Webster's definition leaves much room for confusion as well as interpretation. How “fixed or attached” must something be to be considered a fixture? For example, many cubicle-dwellers have bulletin boards attached to the cubicle walls. Are these items regarded as fixtures even though the worker can move them around at will? Or, would a telephone system be considered a fixture when the phone lines are run through conduits in the building yet the phones themselves can easily be disconnected and removed? (Generally, a phone system is considered personal property because it can easily be removed and adapted to function elsewhere without causing damage to the structure.)

Black's Law Dictionary (Fifth Edition) provides a much more extensive description that, although seemingly complex, actually clarifies these points:

An article in the nature of personal property which has been so annexed to the realty that it is regarded as a part of the land. Leawood Nat. Bank of Kansas City v. City Nat. Bank & Trust Co. of Kansas City, Mo. App., 474 S.W.2d 641, 644. [See below.] That which is fixed or attached to something permanently as an appendage, and not removable.

A thing is deemed to be affixed to land when it is attached to it by roots, embedded in it, permanently resting upon it, or permanently attached to what is thus permanent, as by means of cement, plaster, nails, bolts, or screws. Ordinarily, requisites are actual annexation to realty, or something appurtenant thereto, appropriation to use or purpose of realty, and intention to make article permanent accession to property as gathered from nature of articles affixed, relation and situation of person making annexation, structure and mode of annexation, and purpose or use for which it has been made.

Goods are fixtures when they become so related to particular real estate that an interest in them arises under real estate law; e.g., a furnace affixed to a house or other building; counters permanently affixed to the floor of a store; a sprinkler system installed in a building. U.C.C. 2A-309(1)(a).

Agricultural fixtures. Those annexed for the purpose of farming. In re Shalar, D.C.Pa., 21 F2d 136, 138.

Trade fixtures. Articles placed in or attached to rented buildings by the tenant, to prosecute the trade or business for which he occupies the premises, or to be used in connection with such business, or promote convenience and efficiency in conducting it. Such chattels as merchants usually possess and annex to the premises occupied by them to enable them to store, handle, and display their goods, which are generally removable without material injury to the premises.”

It is customary, when interpreting contracts of insurance, that words be given their ordinary, everyday meanings (unless the words are defined in the policy). It is often difficult, however, especially with regard to fixtures, to determine what is the ordinary or everyday meaning of the term. If there is any ambiguity because of a failure of the policy to define the term fixture the court will construe it in favor of coverage. Even when fixture is undefined in the policy, undefined terms are to be given their generally prevailing meanings. American Deposit v. Myles, 783 So.2d 1282 at 1287 (La. 2001); Service One Cable T.V., Inc. v. Scottsdale Ins. Co., No. 2011 CA 1469,, 2012 WL 602209 (La.App. 1 Cir. Feb. 10, 2012).

Couch on Insurance (Third Edition) states the following: “Generally, items that can be removed from a structure without doing substantial damage to it are regarded as movable property rather than fixtures…The insurance on a building may include electric ceiling fans and chandeliers which are so attached to the insured building as not to be removable without damaging or defacing the building…Fixtures remain fixtures though temporarily removed from the structure to which they are normally attached; as where screen doors and windows are in storage during the winter.” Couch adds that “[t]he term 'store fixtures' has been held to include shelving enclosed within rails as well as a refrigerator, meat box, sausage grinder and scales used in a meat market.”

In Cock-N-Bull Steak House Inc. v. Generali Ins. Co., 466 S.E.2d 727 (S.C. 1996) the Cock-N-Bull Steak House was destroyed by fire. The limits on the building were $500,000 with $150,000 contents coverage. The limit on contents was paid, but when the insured submitted a claim for $56,000 (for a walk-in refrigerator as well as other fixtures and equipment) in addition to the $275,000 building claim already paid, the insurer refused to pay. Examining the contract (which used the ISO language previously quoted), the court noted that “a comparison of the categories 'Building' and 'Business Personal Property' reveals that they are not mutually exclusive. Certain fixtures, machinery, and equipment fall within the definition of both.” Thus, there was coverage for fixtures as well as personal property used to maintain or service the building—which includes coverage for appliances used for refrigerating—under the building limit of insurance.

A fixture installed by a tenant becomes the property of the landlord on termination of the tenancy, with two exceptions. Cal. Civil Code § 1013. The first exception is when there is an agreement allowing the tenant to remove the fixtures. The second exception is where the fixtures are “for the trade, manufacture, ornament or domestic use, if the removal can be affected without injury to the premises .” Cal. Civil Code § 1019; In re Kapoor, No 6:13-bk-10307-MJ, 2013 WL 5979751 (Bkrtcy.C.D.Cal. Nov.12 2013).

The Legal View

In determining whether an object is a fixture and thus realty, a trade fixture and thus personal property, or simply personal property, the courts generally rely on some version of what the court in Wayne County v. William G. Britton and Virginia M. Britton Trust, 563 N.W.2d 674 (Mich. 1997) referred to as the Morris test (Morris v. Alexander, 175 N.W.264 [Mich. 1919]): that is, “property is a fixture if (1) it is annexed to the realty, whether the annexation is actual or constructive [see below]; (2) its adaptation or application to the realty being used is appropriate; and (3) there is an intention to make the property a permanent accession to the realty.” Constructive annexation to realty means that removal of the personal property would leave the personal property so unfit for use that it would be unable to be used elsewhere.  The Morris case was followed in Bielby v. Saginaw Plaza Group, LLC, No. 295564, 2011 WL 668374 (Mich.App. Feb. 24, 2011); Controls Group, Inc. v. Hometown Communications Network, Inc., No. 266347, 2006 WL 1691346 (Mich.App. June 20, 2006); and In re F.R. of North Dakota, Inc., 54 B.R. 645 (Bkrptcy D. N.D 1985).

The case alluded to previously under What are Fixtures?, Leawood National Bank of Kansas v. City National Bank & Trust Co. of Kansas City, 474 S.W.2d 641 (Mo. App. 1971), involved hydraulic lifts that an auto dealer installed in the shop area of the building. The dealer financed the purchase of the lifts through an arrangement with Leawood National Bank in which the bank bought the lifts and leased them to the dealer. The lease stated that the equipment was to “remain personal property.” When the dealership went bankrupt, City National was first deed of trust holder on the property and sold the hydraulic lifts to another party. This action ensued because Leawood National held it should have been able to remove the lifts as lessee.

The court, similarly to Wayne County, held that the “general tests for determining whether a particular object has become a fixture are commonly said to be annexation to the realty, adaptation to the use to which the realty is devoted, and intention that the object become a permanent accession to the land. Of these, the intention is of paramount importance, and sometimes controlling.” Therefore, the wording of the lease (which had never been recorded) notwithstanding, there had been no doubt when the lifts were installed that they should be permanently affixed to the realty and form part of the purpose for which the building was constructed.

However, even though an item is unquestionably affixed to the real estate and is a fixture, contracting parties are free to agree that it will be treated as personal property and therefore not be subject to a mortgage on the real estate. C.I.T. Financial Services v. Premier Corp., 747 P.2d 934 ( Ok. 1987). The law often looks with favor upon the right of a tenant to remove articles furnished or installed by him for the purpose of his occupancy even though they may ordinarily be termed fixtures. Herron v. Barnard, 390 S.W.3d 901(W.D. Mo. App. 2013).

A different conclusion was reached in Rothermich v. Union Planters Nat. Bank, 10 S.W.3d 610 (E.D. Mo. App. 2000). A bowling alley's leased pin-setting machines were screwed, bolted, and riveted to a concrete floor. Under the terms of the lease, the machines were to remain personal property and were not to be considered otherwise by becoming attached to the premises. When the bowling alley was sold, the new purchasers understood the pin-setters were personal property subject to the terms of the lease. The sellers of the bowling alley aided in financing the purchase, and, when a few years later the bowling alley went bankrupt, contended that the pin-setters were part of the real estate and thus subject to the seller's deed of trust.

The court found otherwise and pointed out that the case differed from Leawood, previously. The court said that, unlike Leawood, the intent had always been to treat the pin-setters as personal property, and the properly-recorded lease agreement reinforced that intent. The machines, while affixed to the realty, were attached in such a way that they could easily be removed and installed elsewhere without damaging the realty. This was unlike Leawood, where removal of the lifts meant the concrete floor had to be cut open with a masonry saw and the floor re-laid.

In Mouser v. Caterpillar, Inc., 336 F.3d 656 (8th Cir. 2003), the court held that a rubber mixer in the Caterpillar plant was a fixture because it met all three elements of the Sears (Sears, Roebuck & Co. v. Seven Palms Motor Inn, Inc.,530 S.W.2d 695 (Mo. 1975)) test: “annexation to the realty, adaption to the use to which the realty is devoted, and intent of the annexor that the object become a permanent accession to the freehold.” The court noted that Missouri adopted the constructive annexation doctrine, which states that “a particular article, although not permanently attached to the land, 'may be so adapted to the use to which the land is put that it may be considered an integral part of the land and constructively annexed thereto.'” Applied to the mixer in an industrial setting, the court said, the doctrine is sometimes called the integrated industrial plant rule. Under this rule, the court found that the rubber mixer and its stop pin mechanism were integral to the plant's rubber mixing system and that the way the mixer had been incorporated into the plant's operations satisfied the intent and adaptation requirements, so they were fixtures and part of the real property.

But even when intent and attachment to the realty appear to imply that something is a permanently installed fixture, and thus has building status, the courts may deem otherwise. In The Prytania Park Hotel, Ltd. v. General Star Indem. Co., 179 F.3d 169 (5th Cir. 1999), the court, applying Louisiana law, said that by law “custom-made armoires, night stands, entertainment centers, chests of drawers, desks, wall mirrors, and luggage racks, which were screwed or bolted to hotel walls, were articles of 'furniture,' not fixtures for purposes of property policy that covered only actual cash value of furniture and fixtures as business personal property, but covered full replacement value of permanently installed fixtures.”

Subsequently, in Showboat Star Partnership v. Slaughter, 789 So.2d 554 (La. 2001), the Louisiana Supreme Court stated that “[t]he judicial interpretations of Article 466 have not been consistent, but the courts generally have applied a societal expectations analysis.” Recognizing the discrepancy in federal jurisprudence created by Prytania Park, the court in Showboat nevertheless validated the reasoning of Lafleur and Equibank regarding the relevance of societal expectations and the disjunctive nature of the two paragraphs of article 466. The Showboat court recognized and embraced the societal expectations vis a vis gaming equipment in a vessel, determined that the gaming equipment was temporarily installed, specifically noted that the equipment was regularly moved, and acknowledged that said removal would not result in damage to the vessel or to the equipment itself.

Sometimes there is an intent to prove something is personal property rather than a fixture. Such was the case involving a bankruptcy; if the manufactured home was personalty, then it could be separated from the realty and thus would not be encumbered by the mortgage lien. See In re Claxton, 239 B.R.598 (Bankr. N.D. Okla. 1999). The court stated that “under Oklahoma law, determination as to whether owner of chattel intended to create fixture must be made by objectively examining chattel's affixation to real property.” Because the double-wide manufactured home had been in place for over twelve years, had four tie-downs, flagstone skirting on three of its four sides, attachment to water and electric utilities, two covered attached porches, and trees and shrubs planted adjacent to the home, the court found that the home was permanently resting upon the property despite the fact it was not affixed to a cement slab or foundation. Thus, the home met the first of the three tests. With respect to the second test, the use of the home as a dwelling was an appropriate use. As for the third test, the court said it was obvious that placement of the home was intended to be permanent.

This concept could well impact commercial property insureds who have mobile trailers of the type frequently used as offices on their property. If the mobile homes meet the tests, they may be viewed as fixtures and covered under coverage a. Building; if not, then they are business personal property and should be included when a valuation of this property is made.

Is This a Fixture or Personal Property?

The following are scenarios that have been presented to FC&S by subscribers. We present them with the hope they may assist not only in coverage determination following a loss, but in developing adequate coverage prior to a loss.

Outdoor sprinkler system: The insured has an ISO commercial property form with special causes of loss. There is a sprinkler system in the yard with underground pipes. The sprinkler heads extend about a quarter of an inch above ground. A windstorm toppled a concrete-footed light pole, which, as it fell, uprooted the sprinkler pipes, damaging the system. There appear to be two ways of viewing the system—as a fixture, or as personal property. Which is correct? Is there coverage?

The system could qualify as an outdoor fixture (with coverage falling under coverage a. Building) because of its annexation to the realty, the appropriateness to the use of the realty with which it is connected, and the intention of the insured to leave the system in place. The system should not be viewed as personal property because of the damage to the realty if the system were removed.

However, the commercial policy specifically includes as “property not covered” underground pipes, flues, or drains. Therefore, under a commercial property policy there is no coverage for the loss.

Modular Office System: A commercial property insured has building coverage only. A hurricane damaged the building, and the insured's custom-designed modular office system, comprised of both attached and free-standing units, was damaged. The adjuster says that because the wall-mounted units can be moved elsewhere they are furniture and not covered. We think that because the manufacturer provides special kits for mounting, and a professional must be called in to do the work, the wall-mounted panels are fixtures. Further, removing the wall-mounted units leaves glaring holes that must be patched. If the building were sold, they would be included as part of the realty. (We are not asking for coverage for the free-standing units.)

The panels attached to the building appear to be fixtures for coverage purposes. In reaching this conclusion, we look to the Webster's Collegiate Dictionary meaning of fixture stated earlier. We view the panels as permanently attached and thus part of the building, particularly in light of the intent that they would be included in a sale of the building.

Lawn Tent: The insured country club has a tent that is attached to solid flooring for outdoor events such as receptions and dances. The tent is dismantled each year during the winter and stored. A covered cause of loss damaged the tent; we hold that it is an outdoor fixture and, as such, covered. Or is it, as the adjuster maintains, personal property?

Although, as Couch on Insurance states, “fixtures remain fixtures though temporarily removed from the structure to which they are normally attached; as where screen doors and windows are in storage during the winter,” it is hard to view the tent as a fixture. It is not normally attached to the floor and could easily be used elsewhere, unlike screen doors and windows that fit a particular building.

However, there should be coverage for the tent under business personal property if it is set up within one hundred feet of the described premises.