How do tenant’s improvements and betterments affect my insurance coverage?

Clients who are concerned about this problem generally fall into one of two categories: building owners and tenants. The likely concern here is whether they need to update their insurance limits or whether there are any changes they need to make with their insurance company.

1. For building owners, tenant’s improvements and betterments that change the value of the tenant’s unit have no effect on your limits of insurance. This is because tenant’s improvements and betterments are, by definition, paid for by your tenant and so, as the owner, you have no insurable interest in them. However, depending on the type of changes, there might be an increase in the risk of loss to your building. For example, when placing insurance, your insurer will likely ask about the occupancy of the building. If your building has a restaurant, with a deep fat fryer or a large wood-fired oven on the premises, the underwriter is likely to view that as a higher risk than, say, adding an office space. In that sense, your risk factors have gone up and so your premiums might go up along with them.
2. For tenants, since you are the one paying for these improvements, you will have an insurable interest in them. This means that, if these changes significantly increase the insured values, you will need to update your limits of insurance; otherwise, you run the risk of being under-insured or incurring a co-insurance penalty. Some improvements also bring with them a higher potential for loss. This added risk means you will likely need to pay a higher premium.

The rationale behind all of this is pretty simple: anything that increases the amount of money the insurer pays out or increases the likelihood of you filing a claim needs to be reported to the insurer, even though it will likely result in higher premiums.