Imagine walking into a chic, modern office space with sleek lighting, ergonomic
furniture, and stunning views. The tenant has put a lot of effort into creating a space
that enhances productivity and attracts clients. But did you know that these
alterations, known as betterments, could create complications regarding insurance?
Betterments refer to structural changes a tenant makes to enhance the functionality
and value of a leased property, whether a commercial building or a residential
space. These improvements range from simple cabinet installations to extensive
remodeling projects like erecting law offices or medical clinic walls. Interestingly,
while tenants pay for these improvements, they become the landlord's property and
cannot be legally removed by the tenant.
Properly Valuing and Setting Limits for Betterment
Both parties must understand the value and extent of these betterments and ensure
they’re adequately insured. The trickiest part is determining the insurable interest
for both the tenant and the landlord. This can be addressed in their respective
property insurance or business owners' policies. Failure to adjust the policy to
include the value of these improvements could result in penalties for
underinsurance when a claim is filed.
Types of Claim Payouts
When claiming damaged or destroyed betterments, the tenant has three possible
payout scenarios.
● If the tenant repairs the betterments, they receive either the actual cash
value or the replacement cost value, depending on the policy terms.
● If the landlord or another party makes the repairs, the tenant does not
receive anything since the tenant did not incur any expenses.
● If the betterments aren't repaired or replaced, the tenant receives the
remaining value of the original installation cost. This is calculated by
multiplying the remaining time on the lease by the original cost of the
betterments and dividing by the time from installation to the lease's end date
(including any options to renew).
Betterments insurance is a crucial consideration for tenants and landlords. By
understanding its intricacies and working with a knowledgeable insurance
professional, you can protect your investments and avoid any unwelcome surprises
down the line.
