Insurance Services Office (ISO) form HO 00 04 10 00 (previously form HO-4) 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. The 1982 ISO form provision 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 (cooperative apartments or rental apartments under rent control in a tight housing market), inclusion of improvements acquired becomes significant. This was recognized by the drafters of the American Association of Insurance Services (AAIS) readable personal lines policies, and coverage for acquired improvements and betterments was first included in the AAIS form in 1978. Under both the ISO and AAIS forms, the limit of liability for tenants is 10 percent of the limit for unscheduled personal property (coverage C). In both forms it is an additional amount of insurance. For improvements and installations values in excess of this limit, additional coverage for tenants can be purchased by endorsement (ISO's endorsement HO 04 51 10 00).

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.

Under the AAIS policies, if a secondary location is endorsed onto the policy (endorsement ML-67), the tenant's improvements coverage (10 percent of coverage C) applies to that residence. With ISO homeowners forms, building additions and alterations endorsement HO 04 49 10 00 is used to provide this coverage, with the location of the rented premises and the applicable limit of liability indicated on the endorsement.

Improvements, alterations, and additions insurance is provided as a supplementary coverage under the ISO DP- forms of the dwelling policy program. A named insured, 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 12 02, this coverage is included in (is not in addition to) the limit of liability for coverage C; in forms DP 00 02 12 02 and DP 00 03 12 02, 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.

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 ML-4.

ISO form HO 00 06 10 00 may be used to insure occupants of cooperative apartments as well as condominium unit owners. In that form, 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 amount of coverage can be increased if needed, as explained in general rule 507.

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 are 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.

Under the ISO program, form HO 00 06 10 00 is used to cover condominium unit owners. This form provides coverage for alterations and improvements 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 as explained in general rule 507.Endorsement HO 17 32 10 00 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 10 percent of the coverage C limit, unless the insured selects an optional higher limit.

ISO's current version of the HO 00 06 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. Earlier versions of this condition stated that “if the damage is not repaired or replaced within a reasonable time,” the insured is entitled to recovery on an actual cash value basis. The current version states 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 10 00 and HO 00 03 10 00 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.

Before the introduction of ISO's simplified homeowners forms, the forms stated that coverage for improvements and betterments applied whether the property was installed with the unit originally, was a replacement for original items, or was added later by a unit owner. This language was dropped in the homeowners 76 program, but the effect is unchanged—the insurance applies to any interior building items not covered (or not fully covered) by the association's insurance.

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.

AAIS coverage under “condominium unit owners' additions” applies to “fixtures, alterations, decorations or additions [the insured owns] within [the insured's] unit.” This coverage does not apply to “parts of the building or other property in easements within the unit.” This description is broader than bare walls coverage, in that it could include items within the unit that are beyond the exterior walls. For example, an air conditioner cooling unit in a unit owner's private outdoor patio area could be included. However, the exclusion of property in easements within the unit is restrictive and may result in a problem if the association's insurance covers only the bare walls of the units.

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.