United States: Insurance Coverage For Tenant Improvements

Last Updated: March 21 2011
Article by Dan Millea and Monica Geyen

Published In Insurance Law360, January 6, 2011

Understanding ownership interests and insurance obligations for tenant improvements and betterments, furniture, fixtures and equipment, and other "personal property" within leased premises can be tricky, with multiple factors involved in the analysis. In the event such property is damaged or destroyed, landlords, tenants and their property insurers must take into account the obligations of the landlord and the tenant under any lease in effect at the time of a loss, as well as the coverage provided by the landlord's insurance policy and tenant's insurance policy. The applicable language of those various contracts is often in conflict and can be less than crystal clear, creating considerable ground for dispute as to which party is economically responsible for the damaged or destroyed property. Further, the interpretation and application of relevant lease terms and policy language can vary from one jurisdiction to another. Carefully identifying the contractual duties of the landlord, the tenant(s), and the insurers is essential in order to avoid losses or payments that exceed one's actual obligations.

What Does the Lease Say?

The language in a lease may specify the ownership interests of the landlord and tenant with respect to improvements and betterments and the like, which in turn could impact the question of which insurance policy or policies provide coverage for damage to or destruction of such property.

For example, a lease may provide that once affixed to the premises—whether by the landlord or by the tenant—all improvements and betterments become the sole property of the landlord, are not the property of the tenant, and cannot be removed or altered by the tenant without the express consent of the landlord. A lease may also state that furniture and equipment is the sole property of the tenant. Alternatively, a lease may provide for ownership by the landlord over certain fixtures, improvements and betterments, based on whether they were installed by the landlord or by the tenant, or based on the precise nature of the item.

In the event of a fire, explosion or other catastrophic loss, it can be extremely difficult to determine which items of property were: (1) part of the building's core and shell; (2) part of the improvements and betterments and the like owned by the landlord under the terms of the lease; or (3) part of the property owned by the tenant under the terms of the lease. In addition to the question of ownership over those items, the lease language may specify whether the landlord is contractually required to pay for the replacement of any damaged or destroyed property.

The lease may also address the question of which party is responsible for insuring the improvements and betterments. A lease may require the tenant to insure all improvements and betterments and personal property owned by the tenant. Or it may require only that the tenant insure furniture, equipment and other personal property. Or it may require the tenant to insure only those improvements and betterments or other personal property installed by the tenant. The lease may also specify which property the landlord agrees to insure.

In short, one must closely review any lease at issue to determine: (1) which party owns a given item of property within the leased premises; (2) whether the landlord is required to replace any damaged or destroyed property within the leased premises; and (3) which party was obligated to obtain insurance for a given item of property. Ideally, the lease language will address these issues consistently, so that the line drawn between property "owned" by the landlord or the tenant mirrors the line drawn between the property to be insured by one party or the other. The language is not always consistent or clear, however, which may add further complications in sorting through the parties' respective rights and obligations.

What Do the Policies Say?

A tenant lease is a contract, which governs the rights and obligations between landlord and tenant. In the event of a loss involving the property within the leased premises, another set of contracts will come into play: the landlord's property insurance policy; and the tenant's property insurance policy. The language of those policies with respect to coverage for property within the leased premises may be inconsistent from one policy to the other, and may also be inconsistent with the rights and obligations stated in the lease. Inconsistencies within and between the various contracts can create considerable uncertainty regarding which party is economically responsible for the damage or destruction of property within leased premises.

In a tenant's insurance policy, the scope of coverage for tenant improvements will typically be addressed by the general definition of "personal property" and any specific provisions that relate to coverage for tenant improvements and betterments, furniture, fixtures and equipment and the like. For example, a tenant's policy may explicitly state that personal property includes improvements and betterments installed in any premises owned, leased or occupied by the insured. Absent such an explicit provision, a general definition of personal property may refer to property owned by or in the possession of the insured.

If a tenant's lease states that all improvements and betterments are solely owned by the landlord, the tenant may be unable to demonstrate any ownership interest

in such property and the insurer may take the position that the property is therefore not covered. The tenant may argue that it was in possession of the property and had an insurable "use interest" in the property, and therefore the property was insured despite a lack of ownership. In some jurisdictions, case law may support that argument. For example, under New York law, an insurable interest in property typically includes "any lawful and substantial economic interest in the safety or preservation of property from loss, destruction, or pecuniary damage." Sigola Mfg., Inc. v. Dairyland Ins. Co., 124 A.D.2d 654, 654 (N.Y. App. Div. 1986). Where a tenant agreed in its lease to insure the premises, this argument is even stronger under New York law. Id.

In a policy issued to a landlord, the definition of "personal property" may explicitly include tenant improvements and betterments and the like within premises owned by the landlord and leased to others. Or a landlord's policy may explicitly state that the only improvements and betterments that are covered are those located within property occupied by the landlord. In that case, the insurer may argue that even if a lease between the landlord and the tenant states that the landlord owns the improvements and betterments, those items are not covered property since they are located in premises not occupied by the insured landlord.

Understanding how each policy defines personal property and whether such definitions conflict will be important in determining whether an insurer is responsible for the cost to replace or repair damaged property (or for the actual cash value of such property). This analysis can be further complicated when one or more policies at issue contains an "Other Insurance" provision that makes coverage contingent on the availability of other insurance, an issue discussed below.

What do the Policies Say About Each Other?

Many property insurance policies contain an "other insurance" provision. The language of such provisions varies, but typically they are designed to establish a requirement that in the event of a loss, any other applicable policy must respond first. In concept, a policy containing such a clause would only respond to the extent the "other insurance" was insufficient to cover the entire loss. Not surprisingly, a landlord's policy and tenant's policy may both contain such "other insurance" provisions. The case law in each jurisdiction will be significant in determining how to resolve competing "other insurance" clauses. For example, in Texas, when the "other insurance" provisions conflict, both the tenant's insurer and the landlord's insurer must share the costs. Travelers Lloyds Ins. Co. v. Pacific Employers Ins. Co., 602 F.3d 677 (5th Cir. 2010).

It is possible that both the landlord's policy and the tenant's policy explicitly provide coverage for some of the same property within the leased premises. In that circumstance, the insurers should explore whether it is appropriate to share in the cost of replacing or repairing the property at issue, either due to competing "other insurance" provisions or simply as a reasonable approach to resolving all claims.

Insurers should also be aware of the possibility of a multiple recovery for the same property, with one insurer paying the landlord the full replacement cost for the property and the other insurer paying an actual cash value claim to the tenant for the same property. Further complicating this scenario is the fact that landlords often provide cash up front at the start of a lease term for the tenant to use to fit out the premises. That up front sum is typically added to the monthly lease amount, spread out over the life of the lease. As a result, where property is damaged near the end of a lease term, the landlord may have already been repaid for the original cost to install the improvements, and then be paid again by the insurer for the cost to replace the improvements, with the tenant receiving a separate payment from its insurer for the same property.

Parties should be cognizant of any applicable case law related to these issues to determine whether such multiple or overlapping recoveries are allowed. For example, in New York there is case law supporting the argument that an insurer's contractual payment obligations to the insured cannot be offset by a recovery provided for by another policy. Foley v. Manufacturers & Builders' Fire Insurance Co. of New York, 46 N.E. 318 (N.Y. App. Div. 1897); Alexandra Restaurant, Inc. v. New Hampshire Ins. Co. of Manchester, 272 A.D. 346 (N.Y. App. Div. 1947).


In the event of a catastrophic loss involving property within leased premises, insurers, tenants and landlords should carefully review the applicable language in all leases and policies involved and consider the potential for conflicting terms. Particularly where disputes arise, the parties should consider any jurisdiction-specific case law that may clarify their rights and duties. Ultimately, an understanding of how the provisions of the policies and the lease fit together (or fail to fit together) will be essential in determining where each party's obligations begin and end.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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