What Is Betterments Insurance?

betterments“Betterments” are alterations, build-outs, embedded fixtures and installations added to leased property — usually a commercial building but sometimes residential space, too. While betterments are made and paid for by the tenant for their own use, they become the landlord’s property and cannot be legally removed by the tenant.

Simply put, a betterment is any structural change that adds value to the property or improves its original condition. Making a betterment may be as simple as installing cabinets, or as extensive as moving or erecting walls to create a law office, medical clinic or restaurant. In some cases, betterments may significantly increase the value of a property.

Both the tenant and the landlord should be aware of the extent and value of the betterments and how those improvements will be insured. Each party has its own insurable interest, which needs to be addressed in their property insurance policy or business owners policy. If the insurance policy is not adjusted to reflect the value of the improvements, the insurer could assess a penalty for underinsurance if a claim is filed for damage.

Improvements and betterments become the property of the landlord, but disputes can arise over who is responsible for repairing or replacing them. The lease should clarify whether damages to betterments are considered the landlord’s responsibility or the lessee’s. It can be a point of contention, depending on the wording of the lease and prior legal rulings in that jurisdiction.

“Trade fixtures” are another type of business personal property a tenant can install, but they do not become the property of the landlord. Trade fixtures may be movable or attached to the structure, but generally the tenant removes them when the lease ends. For example, a clothing store might install counters and shelves to display apparel. Trade fixtures are treated as “furniture and fixtures” under the business personal property category in a property policy. The value of these additions should be reflected in the tenant’s property insurance.

Properly valuing and setting limits for betterments

Tenants have a “use interest” in the betterments they’ve made. A tenant’s property insurance insures their interest in the property, but not the property itself (which belongs to the landlord). The tenant has a right to use this property as long as their lease is in force.

In a commercial tenant’s property insurance policy, betterments are addressed under the business personal property category, which specifically covers “fixtures, alterations, installations or additions” that are:

  • Made a part of the structure but aren’t owned by the tenant
  • Acquired or made at the tenant’s expense but can’t legally be removed

For these betterments to be covered under the tenant’s insurance, their value should be included in the tenant’s personal business property payout limits. Commercial property policies usually have a coinsurance clause that requires the policyholder to get enough insurance to cover 80% or 90% of the value of the insured property (depending on the insurer’s rules).

If the policyholder fails to carry that amount of insurance, they will face what’s called a coinsurance penalty at claim time. If payout limits aren’t updated to cover the value of any betterments, the coinsurance penalty might be triggered, which could substantially reduce the amount of the payout when a claim is filed.

For the landlord, the betterments are considered building property, so a landlord’s limits also must be high enough to avoid a coinsurance penalty. Betterments are insured against the same perils (damages) as the rest of the building, such as fires, lightning, windstorms, burst pipes, theft and vandalism.

Policyholders must decide whether they want to cover the replacement cost of betterments or their actual cash value. Replacement cost is the cost of fully replacing damaged property, usually with similar or same-quality materials. Actual cash value is the replacement cost minus depreciation, which may be much less than the replacement cost value. Insuring to the replacement cost value is usually more desirable, but it is generally more expensive.

Bear in mind that some building owners won’t want to include the value of betterments in their property insurance coverage and will specifically exclude them. Tenants need to be aware of this so they can make any needed adjustments to their own coverage. The lease should spell this out.

Types of claim payouts

There are basically three claim payout scenarios for the tenant, depending on the circumstances:

  • If the tenant makes the needed repairs to the betterments, they receive either the actual cash value or the replacement cost value, depending on the terms of the policy.
  • 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 cost of installing the betterments. 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 end date of the lease (including any options to renew).

Condo betterments and master policies

If a unit owner in a condo building makes betterments, the condo association’s covenants, conditions and restrictions (CC&R) dictate how these improvements are treated. Generally, the individual owners are responsible for maintaining any modifications they make to the interior of a unit.

If the association has a “bare walls” master insurance policy, only the structure of the building is covered by the policy. However, an “all-in” master policy may provide added coverage for interior walls and fixtures. It’s best to check the CC&R to see what the association is required to repair or replace and what the unit owners are expected to maintain. Unit owners can insure their units from the “walls in” by purchasing an HO-6 policy.

Work with a real estate insurance pro

Betterments in a large building can add up to millions of dollars, depending on the size and scope of the improvements. Even updating a modest office space with new flooring will run thousands of dollars. That’s why it’s best to work with an insurance professional who specializes in insuring commercial property.

An agent or broker can help you properly value and insure your betterments. Don’t wait until there is a major loss on your property to find out you aren’t covered for improvements and betterments. Get the peace of mind of working with a knowledgeable insurance professional.



This content is for informational purposes only and not for the purpose of providing professional, financial, medical, or legal advice. You should contact your licensed professional to obtain advice with respect to any particular issue or problem.
Copyright © 2022 Applied Systems, Inc. All rights reserved.