Should Your Commercial Property Insurance Cover Tenant Improvements?

If you are a landlord and you have tenants leasing your commercial property, you may want to take a second look at your lease agreement.  You may also want to review your landlord insurance policy to make certain the two are in harmony. Failing to do so may result in unexpected costs, lack of insurance protection, or coinsurance hassles in the event of a claim.

Whose Commercial Insurance Policy Pays for Damage to Improvements?

As the owner of a commercial building, any permanent upgrades made to your property by a tenant become your property, not the tenant’s property. This may seem obvious, but consider the impact should damage be done to such improvements during the tenant’s leasing period. Whose insurance will pay for the repair or replacement cost?  Will either insurance policy pay? Will both pay? Can you live with the uncertainty of not knowing?

Getting it Right When You Craft the Lease Agreement

As a commercial property owner, you should clearly define who is liable for replacing or repairing permanent improvements and upgrades that become damaged. Even though the tenant’s commercial insurance policy normally covers damage to permanent improvements made by the tenant, it may be unwise to put the responsibility exclusively on the tenant.  Here’s why: if the owner takes responsibility then he can include the value of the improvements in the policy limit, thereby avoiding coinsurance penalties.

Did Your Tenant Opt Out of Insuring Permanent Improvements?

If the tenant does not want to insure the improvements, he can exclude such coverage via an Additional Property Not Covered endorsement. Furthermore, it is possible that even though the tenant has insurance for improvements, he may be underinsured.  Finally, if your lease has an early termination provision allowing the owner to cancel the lease if the building is significantly damaged, then the tenant’s policy will not cover the loss.

Ignorance is Dangerous When it comes to Commercial Property Insurance

The scenarios above should make it clear that ignorance of the details of your lease agreement and your commercial insurance policy can be dangerous to your financial health.  The two should be in harmony, especially when it comes to covering permanent improvements made by the tenant. 

Please call us at (610) 775-3838 if  you would like help in obtaining the proper landlord insurance protection for your rented commercial property.