Tenants Improvements and Betterments and Insurance q The

Tenants Improvements and Betterments and Insurance q. The webinar will begin shortly. q. There is no audio at this time. q. This presentation is being recorded for your viewing pleasure at a future date. q 100% Participation in Polling Questions is required to receive credit for this class. Even if you do not intend to receive credit, please participate in the polls. q. The attendance and proctor forms are available under ‘Materials’ in the Webinar’s Console to the right. q. The Power. Point presentation is also available under ‘Materials’. q. You will receive the course number for your state near the end of class. q. Use University the ‘question’ window for Insurance Community 1 questions on the content.

Welcome to your Insurance Community University Audio • All of you are currently on mute – Un-mute your own system – Telephone Option • Select Telephone on your screen • Dial in the PIN number so that your number becomes active – Microphone and/or Speaker Option • You can use this option if you have a headset that you use with your computer Insurance Community University 2

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DOI Requirements • We will file your hours with the DOI after the completion of this webinar and we have received the attendance form. • You have 48 hours to return the form • You will be sent a Certificate of Attendance/Completion by email. Please retain this for your records for five years. Insurance Community University 6

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This class is being recorded • Available in the University – Recorded webinar is not for CE credit • This course is approved for CE in CA and WA Insurance Community University

Disclaimer Insurance forms and endorsements vary based on insurance company; changes in edition dates; regulations; court decisions; and state jurisdiction. This instructional materials provided by Insight is intended as a general guideline and any interpretations provided by the instructor or the creator(s) of this material do not modify or revise insurance policy language. In providing these materials, the authors assume neither liability nor responsibility to any person or business with respect to any loss that is alleged to be caused directly or indirectly as a result of the instructional materials provided. Copyright 2010 – 2014 All Rights Reserved www. insurancecommunitycenter. com Insurance Community University 10

Your Instructor Today Laurie Infantino, CIC, AFIS, CISC, ACSR, CISC, CRIS President and Co-Founder of The Insurance Community Center Insurance Community University

What This Course Will Cover This course will focus on reviewing lease requirements relating to TIB’s; who is responsible to insure the TIB’s; valuation; and the placement of insurance. The following topics will be discussed. 1. What constitutes Tenants Improvements and Betterments; Alterations; Personality; Trade Fixtures 2. Overview of the challenges in insuring TIB’s 3. Lease Review 4. Policy Review for insuring TIB’s Insurance Community University 12

Polling Question #1 Insurance Community University

1) What constitutes Tenants Improvements and Betterments; Alterations; Personality and Trade Fixtures? Insurance Community University 14

Tenants Improvements and Betterments (what they constitute) • Improvements or Betterments refer to permanent, constructive additions made to the interior OR exterior of a building. Often when a tenant leases commercial space, the space is provided as a shell, without the fixtures the tenant requires to carry on operations. Insurance Community University 15

Alterations and Personality • Sometimes referred to as “alterations” • Could include “trade” fixtures or stylist improvements sometimes referred to as “personality” Insurance Community University 16

Alterations and Personality • Stylistic to the branding of the operation Insurance Community University 17

Trade Fixtures • Trade fixtures may be removable at the lease termination (refer to lease) • Property items to be removed by tenant upon lease termination Insurance Community University 18

Polling Question #2 Insurance Community University

Examples • They can include common types of changes to an empty space or a space occupied by a prior tenant such as: – Interior/Dividing walls – Acoustical insulation – Kitchens/bathrooms – Permanently installed shelving or cabinetry fixed seating – Internal wiring or plumbing Insurance Community University 20

Tenants Improvements and Betterments (Who Installed Them? ) • The term Tenants, Improvements and Betterments would “imply” that a tenant installed the improvements – Installed by tenant at tenant’s expense – Installed by a prior tenant – Substantially installed by a prior tenant and altered by the current tenant Insurance Community University 21

Tenants Improvements and Betterments (Who Installed Them? ) • Installed by lessor at their own expense as an enticement for a long term lease • Installed by lessor and paid for by the tenant by virtue of increased rent • Installed by lessor at “no” charge Insurance Community University 22

What all of these definitions have in common is that…. • Tenants, Improvements and Betterments (TIB’s) are a very expensive investment for a business that is leasing premises and investing in permanent building attachments that may or may not be subject to removal at the end of their lease. Insurance Community University 23

Lease Review Insurance Community University 24

Polling Question #3 Insurance Community University

Lease Review • Look at entire lease • When you send a letter to insured do NOT say you reviewed the entire lease. • Indicate those specific sections and subsections you reviewed Insurance Community University 26

Lease Basics Lease language • Often archaic and “boilerplate” wording • Legal perspective only – not risk driven Lease review by insurance brokers • Terms used can be confusing • Terms used by attorneys often do not match with insurance terms Clients often do not read the language before signing Insurance Community University 27

Lease Review Sections as relates lease • INSURANCE – Tenant’s Policies of Insurance • Insurance covering…. – All of the Tenant Improvements, Alterations and Personality – Plate Glass in the Premises (Tenants Glass End) – Air Conditioning Unit Servicing the Premises » Quite often, an argument arises when a lease states that the tenant must replace ownerinstalled fittings if they are damaged or destroyed. Insurance Community University 28

Air Conditioning http: //www. propertycasualty 360. com/2003/1 0/15/improvements-betterments-revisited • A severe winter storm, followed by subzero temperatures, caused the pipes to freeze. One of our clients was a tenant in a multi-occupancy building. His lease made him responsible for the air conditioning apparatus on the roof, which was damaged. • Although the cause of the loss was covered, the property wasn’t. Our tenant-insured had not paid to have the equipment installed in the first place. Despite that, the lease made him responsible for it. Since he was a tenant, he didn't carry any building coverage so was left with an uninsured loss. Insurance Community University 29

Air Conditioning http: //www. propertycasualty 360. com/2003/1 0/15/improvements-betterments-revisited Agents should be aware of such potential coverage gaps when handling insurance for tenants, because tenants logically may assume that the "improvements and betterments" mentioned in their leases are automatically insured through the T & B provisions of their insurance policies. Insurance Community University 30

Lease Review Sections as relates lease • INSURANCE – Policy Form of Tenant’s Insurance and Limits • All Policies required will be issued by insurance companies qualified to do business in the state – Rating of A – Financial Rating of X or better according to Best’s Insurance Guide…. Insurance Community University 31

Lease Review Sections as relates lease • INSURANCE – Policy Form of Tenant’s Insurance and Limits • • 100% of replacement cost Against Direct Physical Loss Deductible not to exceed $1, 000. 00 per policy Policy must contain a provision that the company will give to Landlord written notice twenty (20) days in advance of any cancellation or reduction in coverage Insurance Community University 32

Lease Review Sections as relates lease • MAINTENANCE – This section obligates the tenant to repair or replace their leased premises. (example of language) – Tenant agrees to maintain their premises and make all repairs and replacements in and to the premises. This requirement includes any repairs to the tenant’s work, any alterations, and any distinguishing refinements to the premises referred to as “personality”. Insurance Community University 33

The Question is HOW to Insure • "When the insurance is required by the lease document, be it real or personal property, the insured/tenant must satisfy the contractual requirement via an insurance product or selfinsure. The lease establishes the insurable interest—BUT OFTEN NOT SO CLEARLY. http: //www. propertycasualty 360. com/2003/1 0/15/improvements-betterments-revisited Insurance Community University 34

Policy Review Insurance Community University 35

Insurance Issues/Insurance Solutions Building Owners Installs the TIB’s and does not require Leasee to Insure Include in Building Owner Building Insurance Insure as part of the Building Limit Building Definition Building, meaning the structure defined in the declarations including: • Completed Additions • Fixtures, including Outdoor Fixtures • Permanently installed machinery and equipment Insurance Community University 36

Insurance Issues/Insurance Solutions Building Owners Owns the TIB’s Upon Termination of the leasees lease Include in Building Owner Building Insurance Insure as part of the Building Limit (increase amount of insurance Building Definition Make Certain the Building Owner reports to you every time a tenant leaves so that the Building Amount can be increased. If they do not, they will have insufficient limits and potentially suffer a coinsurance penalty. Insurance Community University 37

Insurance Issues/Insurance Solutions Tenant Installs the TIB’s at their own expense Include in Business Personal Property limit OR activate the Building Coverage Building Definition Your Business Personal Property located in or on the building described in the Declarations or in the open (or in a vehicle) within 100 feet of the described premises, consisting of the following unless otherwise specified in the Declarations or on the Your Business Personal Property – Separation of Coverage form Insurance Community University 38

Your Business Personal Property Separation of Coverage Form • Can separate out TIB’s • TIB’s will then take the building rate • If separate out then you can add Building Ordinance to TIB’s more simply • This could also have been done by activating the Building Coverage but many companies will not allow that solution Insurance Community University 39

Insurance Issues/Insurance Solutions Tenant Installs the TIB’s at their own expense Include in Business Personal Property limit OR activate the Building Coverage Your use interest as tenant in improvements and Building Definition betterments. Improvements and betterments are fixtures, alterations, installations or additions: (a) Made a part of the building or structure you occupy but do not own; and (b) You acquired or made at your expense but cannot legally remove; Insurance Community University 40

BOP TIB • Does not include the term “use interest” (3)Tenant's improvements and betterments. Improvements and betterments are fixtures, alterations, installations or additions: (a) Made a part of the building or structure you occupy but do not own; and (b)You acquired or made at your expense but cannot legally remove; Insurance Community University 41

Use Interest • No definition in the policy • The general accepted understanding of “use interest” is that the party to the contract that has “use interest” has an insurable interest while using a premises or TIB and that insurable interest ceases when the insured is not longer in control of the premises. This term is used in the valuation clause of the policy Insurance Community University 42

Acquired or Made at their expense • There is no definition of “acquire” in the insurance policy. It is generally assumed that the term “acquire” means that someone paid for something. However, the term “acquire” can include: to receive, accept, to come into possession, ownership, or control of the property. Most of these definitions for “acquire” do NOT require that the tenant paid for them. Insurance Community University 43

Acquired or Made at their expense • However, if that were the argument, it could be contended that the tenant did, in fact, pay for them by virtue of the amount they pay for rent. The landlord clearly would have considered all of the building items and improvements in setting the rate of lease payments. • http: //dictionary. findlaw. com/definition /acquire. html#sthash. ej 4 Tn. MAF. dpuf Insurance Community University 44

Acquired • We have often taught that the TIB paragraph should read – (b) You acquired; or made at your expense; or are contractually obligated to insure but cannot legally remove. • While we advise that this language is stronger in support of coverage for the tenant that is required to insure the TIB’s left by a prior tenant; the reality is that the insurance companies are not willing to make these editorial changes. Insurance Community University 45

Can Not Legally Remove • This language would “preclude” coverage for additions and alterations that the tenant “can” remove based on lease language. • How do you provide insurance under those circumstances? ? ? Insurance Community University 46

Trade (Utility) Fixtures Property that can be removed upon lease termination These are NOT covered by TIB language in the policy These items are NOT other types of BPP Manuscript language to policy Insurance Community University 47

Insurance Issues/Insurance Solutions Tenant does NOT install or pay for TIB’s BUT tenant is required to insure in lease Owner Installed Prior Tenant Installed 1. There is the contractual requirement to insure; however the policy language does not allow for this to be covered under TIB 2. There is a good chance this claim WILL be DENIED even if the amount is included in the policy Insurance Community University 48

Suggestions • Explain the situation to the tenant and see if there is any way they can talk to the building owner to have them insure the TIB’s and charge them accordingly. Needless to say, amending the lease would be the best answer but in the absence of that modification, everything should be documented in writing. Insurance Community University 49

Suggestions • If the first solution does not work – Send a copy of the lease to the underwriter highlighting the area that is asking the tenant to provide insurance on the TIB’s – Get the underwriter to acknowledge in writing that they agree that the tenant is required to insure the TIB’s – Provide the underwriter with the values for the TIB’s Insurance Community University 50

Suggestions – Verify that the underwriter included them in the values which is best done with a statement of values – Have the underwriter acknowledge that the insurance under TIB’s will cover the TIB’s installed by the prior tenant Insurance Community University 51

Valuation CP 10 10 e. Tenant's Improvements and Betterments at: (1)Actual cash value of the lost or damaged property if you make repairs promptly. (2) A proportion of your original cost if you do not make repairs promptly. Insurance Community University 52

Valuation CP 10 10 We will determine the proportionate value as follows: (a) Multiply the original cost by the number of days from the loss or damage to the expiration of the lease; and (b) Divide the amount determined in (a) above by the number of days from the installation of improvements to the expiration of the lease. If your lease contains a renewal option, the expiration of the renewal option period will replace the expiration of the lease in this procedure. (3) Nothing if others pay for repairs or replacement Insurance Community University 53

Causes of Loss Are “perils” specified? Fire, EC All risk Special form Lessor AND lessee should ALWAYS have Equipment Breakdown coverage Insurance Community University 54

Tenants Improvements & Betterments Ownership Responsibility Who installed the TIBs Who is responsible to repair/insure Insuring TIB Automatically BPP Add Separation of Coverage Building Ordinance Insure TIB for Building Ordinance Insure BO on Business Income Insurance Community University 55

How about Legal Liability Coverage Form (CP 00 40 • Tenant (leasee) is “legally liable to insure” – We will pay those sums that you become legally obligated to pay as damages because of direct physical loss or damage, Insurance Community University 56

Legal Liability Form with Special Cause of Loss form CP 1030 • C. Legal Liability Coverage From – The following additional exclusions apply to insurance under this Coverage Form: Insurance Community University 57

Legal Liability Form with Special Cause of Loss form CP 1030 (a) Contractual Liability We will not defend any claim or "suit", or pay damages that you are legally liable to pay, solely by reason of your assumption of liability in a contract or agreement. But this exclusion does not apply to a written lease agreement in which you have assumed liability for building damage resulting from an actual or attempted burglary or robbery, provided that: (i) Your assumption of liability was executed prior to the accident; and (ii)The building is Covered Property under this Coverage Form. Insurance Community University 58

What if the tenant had NO damage on their TIB’s • No damage to most of the building • Building closed for over a year • Businesses moved out • Businesses lost their lease • Businesses lost the value of the TIB Insurance Community University 59

Solution • No Damage • Lost Lease • Solution: Leasehold Interest Insurance Community University 60

Check List • Check lease to determine which party is required to insure the TIB’s • Check lease to determine if the leasee is required to insure and other “building” items that the lessor installed such as air conditioning • Check lease to determine who must repair or replace TIB (often found under the Maintenance Agreement Insurance Community University 61

Check List • Check lease to determine specific requirements as relates TIB/Building items – Company rating – Admitted – Deductible – Valuation – Perils – Amount of coverage Insurance Community University 62

Check List • Consider insuring TIBs under the building definition • If insuring TIB’s under Your Business Personal Property include the Separation of Coverage Endorsement • Note that many TIBs are subject to ordinance or law when rebuilding Insurance Community University 63

Check List • Make sure building owners report when tenants leave so coverage can be increased • Make sure building owners report if a tenant leaves and the building/space is vacant Insurance Community University 64

Upcoming Classes 2/20 Certificates and Additional Insureds 2/26 & Ethics, Privacy and Compliance 27 3/4 Annuities 3/6 Personal Auto – 5 Key Issues Insurance Community University