We writers and editors of FC&S Online have a good bit of interaction with our subscribers, and some of that involves lengthy discussions and even — can you believe it? — heated debate. One of the most common areas of disagreement is tenant improvements and betterments (I&B), and the associated coverage for it.

Both the standard business owners and commercial property coverage forms define I&B as fixtures, alterations, installations, or additions that become part of a building that the tenant does not own and that the tenant acquired or made at his own expense but cannot legally remove. Various courts have ruled that the additions must also be substantial (not merely putting in a few shelves) in order to qualify.

The debate we usually get into with FC&S subscribers is what qualifies as “acquired or made” at the named insured's expense. What does that term actually mean?

I maintain that “acquired or made” means that the tenant must have actually paid for them, had them installed, or personally installed them. But often subscribers counter that the term should encompass a tenant paying a higher rent because the property was built-out by the owner.

I don't think that qualifies. After all, how can we prove that the additional rent actually subsidized the build-out? How much of the rent should be allocated to the basic real property and how much to the fixtures and alterations that made the space suitable for the tenant's use?

Quite often, this argument arises when a lease states that the tenant must replace owner-installed fittings if they are damaged or destroyed. But that doesn't change the situation — regardless of what the lease says, if the tenant didn't actually pay for the build out, they do not qualify as I&B for insurance coverage purposes. If they don't, tenants are out of luck if they are destroyed and they have to assume the cost of rebuilding them.

The concept of coverage for I&B is tricky, but coverage language is very clear on the matter. The tenant must actually pay for the build-out in order for the standard policies to respond. It's too late to read the lease after the building burns down.

Have you encountered this situation? How have you handled it?

This blog post is meant to provide insights into insurance coverage issues in general, and does not necessarily account for the differences in law and practice in different venues. As such, the opinions expressed within should not be construed as legal advice for the unique circumstances of any particular claim or suit.

Special Reports /

Coverage For Tenant Improvements And Betterments

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