§ 10.05 Insurance Coverage for Damage to Tenant Property and Improvements

• Jurisdiction: United States
• Publication year: 2022

§ 10.05 Insurance Coverage for Damage to Tenant Property and Improvements

[1]—Ownership Interests and Insurance Obligations

A number of factors come into consideration when analyzing and determining "ownership interests and insurance obligations for tenant improvements and betterments, furniture, fixtures and equipment, and other 'personal property' within leased premises."¹ When a loss occurs, the parties and their insurers must consider the landlord's and tenant's obligations under their lease in effect at the time of a loss as well as the terms for coverage provided by their insurance policies. Disputes will certainly arise when the contracts are either unclear or contain conflicting language. Further, the interpretation and application of relevant lease provisions and insurance policies often vary by jurisdiction. Therefore, it is important to determine and clearly articulate the parties' rights and responsibilities and consider the type and extend of insurance coverage.

[2]—The Lease Language

Lease often specify ownership interests relating to improvements and betterments. How these ownership interests are set forth could affect which insurance policy or policies will cover loss resulting from damage to or destruction of the property. The lease may also specify the insurance obligations of the parties with respect to the property, such as furniture, fixtures and equipment. Responsibility and ownership can be allocated to one or the other party, shared, or based on which party installed the items, the nature of the items, the right of one or the other party to alter or remove the items, or some other determination.

The lease may also specify whether the landlord (or tenant) is contractually required to bear financial responsibility for the maintenance of the property or the replacement of damaged or destroyed property.

The lease may also apportion responsibility for insuring the improvements and betterments.

In any event, the lease must be closely examined to determine: "1) the ownership interest in a given item of "personal property" within the leased premises; 2) any landlord responsibility to replace damaged or destroyed property within the leased premises; and 3) obligations to insure a given item of property. Ideally, the lease language will address these issues consistently, so that ownership and insuring responsibilities mirror each other. Unfortunately, that is often not the case, which further complicates efforts to understand the parties' respective rights and obligations."²

[3]—Insurance Policies and Coverage³

In addition to the lease, the landlord's and the tenant's insurance policies will come into play when a loss occurs. Here, too, complications arise when the parties have multiple insurance policies. The language of these various policies may be inconsistent, and the applicable policy or policies may also conflict with the rights and obligations set forth in the lease.⁴ "Such inconsistencies and ambiguities within and between the various contracts at play can create considerable uncertainty regarding economic responsibility for the damage or destruction of property within leased premises."⁵

Understanding how each policy defines "personal property" and whether existing policies contain conflicting definitions will be necessary when determining whether and the extent to which an insurer will be financially responsible for replacing or repairing damaged property (or paying its actual cash value).⁶

The tenant's insurance policy may contain a definition of "personal property" and "may explicitly provide that personal property includes improvements and betterments installed in any premises owned, leased or occupied by the insured. Absent any such explicit provision, however, a general definition of personal property may refer to property owned by or in the possession of the insured."⁷

If the lease states that all improvements and betterments belong solely to the landlord, the tenant may not be able to establish an ownership interest in the property so that the tenant's insurer may determine that the property is not covered. In such a case, the tenant may try to argue that its "possession of the property creates an insurable 'use interest' in the property, and therefore, the property is insured, despite the lack of an ownership interest."⁸ There is some legal authority to support this...