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The Rough Notes Company Inc.



November 29
10:26 2017

Grover leased its building and personal property to Carma to use as a restaurant. Carma vacated the lease and damaged the building while taking the personal property with it. Grover filed a claim with Aspen Insurance for the stolen personal property and the damage to the building. Aspen denied coverage because the property had been entrusted to Carma at the time of the loss. Grover argued that a lease is not an entrustment so coverage should apply.

See how the courts ruled.

Aspen Insurance UK, LTD (Aspen) provided insurance that covered both business real and business personal property owned by Grover Commercial Enterprises, Inc. (Grover). The property and contents were leased by Grover to Carma, LLC (Carma), which operated a restaurant at the location. Under the lease arrangement, Carma, during the lease’s term, was held to be in full possession of all of the leased property.

Later, during the lease term, Carma left the property. After it vacated the location, Grover filed a loss, asking for coverage caused by Carma’s theft of business personal property and for damage to the building caused by the business personal property’s removal. Aspen denied the claim. The denial was based upon the Aspen policy’s “Entrustment Exclusion” that barred coverage for loss or damage due to dishonest or criminal acts on the part of the insured (Grover) or any party to which the insured entrusts property. Grover sued. After a lower court ruled in favor of Aspen, Grover appealed.

Grover argued that the lower court ruling was in error. Grover believed that the entrustment exclusion was ambiguous as their tenant, Carma, was not specified and that leasing property is distinct from entrustment. The higher court reviewed the matter. It found that, as a matter of course, leasing property to another party is a manner of entrustment and the exclusion was applicable. The lower court ruling in favor of Aspen was affirmed.

“Grover Commercial Enterprises, Inc. v. Aspen Insurance UK, LTD., et al., Appellees. District Court of Appeal of Florida, Third District. No. 3D14-1987. Filed September 7, 2016. Affirmed. Westlaw 202 So. 3d877

Business personal property or improvements and betterments?

Grover covered the business personal property under his policy but he could have required that Carma provide the insurance for that property because Carma had a use interest in the property. Carma could have chosen to insure it as business personal property or as improvements and betterments. Many producers choose the business personal property route but others have found a better way to insure the more permanent items as specific improvements and betterments, which is subject to the lower building rate instead of the business personal property rate.

Review the Improvements and Betterments PF&M article below.


Improvements and Betterments coverage protects a tenant’s use of and interest in improvements and betterments it installs or arranges for in the leased building. This coverage is available to only named insureds that are tenants. The insured may have made the improvements and betterments that are eligible for coverage or a previous tenant may even have made them but only if the insured purchased them from that tenant. The important point is that the insured has invested in these items but cannot remove them. This coverage is part of CP 00 10–Building and Personal Property Coverage Form. Because the insured cannot remove improvements and betterments from the premises, but has a use interest in them, a special method for valuing tenants’ improvements and betterments is a part of the coverage form.


Improvements and Betterments coverage may be written as either separate insurance or as part of the coverage on personal property in CP 00 10–Building and Personal Property Coverage Form. It covers the insured’s use of and interest in improvements and betterments made or added to a leased building.


If a covered cause of loss damages or destroys improvements and betterments during the policy term, payment is determined as follows:

  • The actual cash value of the lost or damaged property is paid if the insured makes repairs. These repairs must be made promptly.
  • A proportion of the original cost is paid when the insured does not repair or replace the items in a reasonable time period. This proportion is calculated as follows:

Step 1: Determine the original cost of the damaged improvement and betterments.

Step 2: Determine the number of days from the date of loss to the expiration date of the lease or the expiration of any lease renewal option.

Step 3: Multiply Step 1 by Step 2.

Step 4: Determine the number of days from the date that the damaged improvements and betterments were installed to the expiration date of the lease or the expiration of any lease renewal option.

Step 5: Divide Step 3 by Step 4.

Example: Clayman Industries leases a building on a 20-year lease with a 10-year renewal option. Clayman made substantial improvements to the building at its own expense that cannot be removed. The cost of the improvements was $200,000 when the lease was signed in January 2004. A windstorm destroys the building in January 2014 and Clayman decides to relocate to another state. The loss payment is determined as follows:

Step 1: Cost is $200,000

Step 2: 20 years X 365 days = 7,300

Step 3: $200,000 X 7,300 = $1,460,000,000

Step 4: 30 X 365 = 10,950

Step 5: $1,460,000,000 / 10,950 = $133,333

Clayman receives $133,333 for its loss of use value of the improvements and betterments.

Replacement Cost Optional Coverage

Improvements and betterments may be written on a replacement cost basis instead of on an actual cash value basis. In that case, if the insured actually repairs or replaces the improvements and betterments, it recovers on that basis. However, the proportional method is used to determine the settlement if the insured does not make the repairs or replace the improvements.


Improvements and betterments are defined as fixtures, alterations, installations, or additions that become a part of the described building that the tenant makes or acquires at its expense. It does not include rent paid. The tenant cannot legally remove them from the building.


Coverage on improvements and betterments may be written for a tenant that occupies a building under a conventional term lease, on a month-to-month basis, or under another form of rental agreement. The insured is not required to actually occupy the building to be eligible for coverage. Coverage may also be written for a lessee that has installed or acquired improvements and betterments at its expense and subleases or rents the premises to others.

Improvements and betterments are not limited to those installed during the term of the current lease. Coverage also applies to those made to the building or that the insured acquired at its expense at any time during its tenancy.


The way improvements and betterments are scheduled determines the rate used. The personal property rate is used if the improvements and betterments are included in the same limit as other personal property. The building rate is used if they are listed and scheduled separately. This difference is logical because the tenant cannot legally remove the improvements and betterments from the building without damaging the building. This property usually falls into the category of building and the insured should benefit from using the building rate.

At times, the insured might not want to schedule the improvements and betterments separately because the values are low. The insured is penalized when it makes that decision and the higher personal property rate is used.

Example: Pete’s restaurant is in a building that John owns. A previous tenant installed the cooking equipment, ovens, and booths. Under the terms of the lease, Pete must pay $10,000 in advance towards the cooking equipment and then $1,000 per month for the cooking equipment in addition to his lease payment for five years. Pete has a five-year lease with John with an option for five additional years. The terms of the lease require Pete to repair the damaged equipment. Pete includes the value of the improvements and betterments in his $100,000 personal property limit of insurance because of that requirement.

The personal property rate is 1.00 and the premium is $1,000. His new insurance agent explains that the value of the improvements should be broken out and written separately. Pete revises his limits to reflect $65,000 on improvements and betterments and $35,000 on personal property. Because the building is masonry non-combustible construction, its rate of .30 applies to the improvements and betterments. Using the new allocation of limits, Pete’s premium is reduced to the sum of $195 ($65,000 x.30) plus $350 ($35,000 x 1.00) for a total of $545.


The building owner has an interest in the improvements and betterments because they revert to it when the lease ends. As a result, the building owner’s coverage should include the value of all tenants’ improvement and betterments in its building values. The tenant’s policy should not include the building owner as an additional insured with respect to these improvements and betterments because the interests of both parties in the property are not the same. The only time the building owner could be added is when the tenant is contractually required to compensate the building owner for damage to its improvements and betterments.


CP 00 17–Condominium Association Coverage Form covers all fixtures, improvements, and alterations within a unit. However, this is only if the by-laws state that the condominium association owns such property. If the unit owner owns them, that unit owner must cover them.

Similarly, with CP 00 18–Condominium Commercial Unit-Owners Coverage Form, a business that occupies a unit of a commercial condominium may insure fixtures, improvements, and alterations that make up part of the building that the unit-owner owns as a separate item of insurance.


Improvements and betterments are actually improvements to the real estate or to the building that the tenant or lessee installs or pays for or that it acquires at its expense, exclusive of rent paid. They are permanent in nature. Some examples are a new storefront, decorations, partitions, acoustical insulation, and elevators. They usually represent significant value but they are not personal property because the tenant cannot remove them.

Improvements and betterments eventually become part of the building and the building owner’s property. The building owner should insure them as part of its building coverage. However, the tenant also has an interest in them and can insure them as such because it installed or acquired them at its expense for its own benefit while it occupies the premises. This is described as the use interest in the improvements and betterments. Courts and others use it to attempt to more accurately describe the type of insurable interest a tenant has in the improvements and betterments as opposed to an outright ownership interest.

When arranging loss recovery on an unamortized basis, the recovery is based on a proportion of the original cost of installing the improvements and betterments. For example, the insured tenant makes alterations or improvements and must spend $5,000 to remove a portion of the existing building to make the changes. It then installs the improvements valued at $10,000. This coverage enables the tenant to recover an insured loss based on the entire $15,000 installation investment. Recovery on this basis makes the insured whole and also enables it to properly amortize the entire investment, including the $5,000 wrecking or tearing-out expense. However, if the insured tenant actually replaces the damaged improvements, the form properly limits it to the actual cash value of the damaged improvements. This is because it would then be necessary to restore the improvements themselves and not again incur the expense of tearing out any portion of the building. In some cases, and for these reasons, the original cost may exceed the actual cash value.

Improvements and betterments coverage is subject to coinsurance. Whether listed separately or included with other personal property, a coinsurance penalty is applied if not insured to current actual cash value.

Example: A tenant installs improvements and betterments valued at $15,000 at the beginning of a five-year lease from 01/01/17 to 01/01/23. A fire on 01/01/21 destroys them and the tenant replaces them.

Recovery is based on the full actual cash value as of 01/01/21. As a result, the valuation starts with replacement cost new as of 01/01/21. Depreciation must then be calculated and subtracted from that replacement cost. A coinsurance penalty could be applied if the items are underinsured.

Recovery is based on the unamortized basis of the years that remain on the lease if the improvements and betterments are not replaced. That basis is $3,000, one-fifth of the $15,000 original cost.

Example: Use the same situation above but add a five-year lease renewal option. The fire occurs on 01/01/27 instead of on 01/01/21. The actual cash value now is even less because of depreciation. If the property is not replaced, the unamortized value is only of $1,500, one-tenth of the original cost of $15,000.


Leases must be reviewed carefully to determine exactly who owns the improvements and betterments. Standard wording usually states that all improvements and betterments become the building owner’s property but there may be exceptions. This is particularly important if extensive improvements and betterments are made at a specific property. The lease should list the property that can be removed when the lease ends and the property that must remain. The property that remains is the improvements and betterments. In most cases, the permanently installed property becomes the building owner’s property at the end of the lease and property easily removed belongs to the tenant. An important exception to this rule involves any property that specifically refers to the tenant by name or trademark. The lease should identify and address these situations.


Duplicate coverage may apply in cases where neither the building owner nor the tenant repair the damage or replace the property. In such cases, the tenant could collect based on the proportion of its use interest in the improvements and betterments and the building owner could receive the actual cash value of the improvements and betterments because the building coverage limit should include them. However, if the building is repaired and improvements and betterments replaced, coverage applies to only the party that actually made the repairs or replaced the improvements and betterments.

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