What is improvements and betterments insurance?
“Improvements and Betterments refers to upgrades done by a business owner to a property that is rented from a landlord. According to IRMI, the International Risk Management Insitute improvements and betterments are “permanent additions or changes made to a building by a lessee at his or her own expense that may not legally be removed.” These improvements and betterments, or upgrades, are paid for by the tenant (the business owner). Since the building belongs to the landlord, he will obtain ownership of said upgrades, unless a contract, states otherwise.
Improvements and Betterments insurance is the coverage taken for these upgrades. The building in its original state should be covered by a Property and Casualty policy.
It is worth highlighting that ‘improvements and betterments’ are often covered in property and casualty insurance, for both tenants and property owners.
How does Improvements and Betterments insurance work?
Let us paint a picture of how this insurance coverage works. Say Alfred wanted to open a grocery store. To do this he rents part of a building.
The building Alfred rented is older and slightly outdated. To fix it up and make it feel more like a grocery store he:
– Improves the lighting.
– Upgrades the flooring.
– Paints the walls.
– Installs refrigerators and shelving.
Alfred did all of this without any financial help from his landlord.
One night there is an electrical problem in the back with one of the freezers. It starts a fire and Alfred’s store, along with the businesses on either side of him, are destroyed. Who is responsible for these losses?
Well, if those betterments and improvements made by Alfred were covered in the landlord coverage, then that claim should indemnify both. If it was not covered by the landlord coverage, Alfred should have his own Improvements and Betterments clause in his property coverage.
If coverage is not found in either of these policies then Alfred would have to face the loss alone.
What is the difference between Improvements, Betterments and Trade Fixtures?
What if Alfred decides to move his grocery store? When a tenant decides to leave the rented space, they cannot tear out any improvements they have installed since “Improvements and betterments” are thought to be permanent. In this case, Tenants should ensure that their leases clearly specify what types of property qualify as betterments and which ones are trade fixtures.
The lease should also specify when ownership passes from the tenant to the landlord. They often occur when the improvements are done in the building. This is because improvements can increase the value of the property.
In the case of the landlord, if the policy did not include betterment coverage with the updated value of the property, they may find the insurance provider not willing to pay enough to restore the structure with the improvements.
In regards of tenants, they should make sure their business property policy includes the cost of betterments in case they need to be repaired or replaced. A common mistake among tenants is to assume that since the property owner gets to keep the improvements, they should be the ones to pay. This is not the case unless explicitly stated in the contract. Even if the modifications are necessary for the tenant to do business, the owner is under no obligation to restore them unless the lease stipulates it is the landlord’s responsibility.
Trade Fixtures are a whole other story. Trade Fixtures are items installed by the tenant that the tenant expects to remove upon leaving. They are essential to the tenant’s business and can be removed without damaging the property. Trade fixtures remain the property of the tenant, so, they are responsible for insuring them. Otherwise, the landlord might refuse to allow the tenant to remove certain property when the lease expires.
The importance of clearness and transparency
As discussed above, transparency about responsibilities is fundamental when dealing with improvements, betterments, and trade fixtures. Being clear about who must take care of what, the limit of the coverage in each policy, and what constitutes an improvement that is permanent or a trade fixture that is temporary, is of utmost importance, to avoid conflicts between tenants and property owners and have all commercial property, covered by insurance.