When it comes to commercial losses, taking the time to view the policy and figure out the applicable laws of the controlling state are necessary. However, sometimes, the basics are forgotten by even the insurance carrier. In an ideal world, losses are cut and dry but the reality is that almost every detail is up for interpretation of some sort. In a commercial loss, often more than one insurance policy kicks in when there is a landlord and tenant situation. The basic rule of thumb is that the landlord’s policy usually covers the real property loss while the tenant’s business personal property is covered under the tenant’s own business policy. However, often these lines are blurred and not definite. In order to determine coverage, both insurers will often request a copy of the lease to decipher whose policy covers what items destroyed.
The area of larges dispute seems to fall under tenant improvements and/or betterments. In California, the usage of “betterments” is synonymous to “improvements”. The terms are used in a first party property policy insuring a tenant. Betterments refer to substantial alterations, additions, or change to the property—something more than a simple or minor repair.1 The best example of a common tenant improvement may be the installation of a restaurant walk in refrigerator. After the installation of a walk in refrigerator, a tenant often transfers that benefit over to the landlord upon leaving the property. To tear out such an improvement would cause substantial damage to the real property belonging to the landlord.
However, after a loss, such as fire or water, an operating restaurant that installed and maintains the walk in refrigerator may claim the refrigerator as a lost item if destroyed to their insurance company. In California, tenant’s improvements made by a tenant/insured are covered under a business policy covering first party losses. A denial of tenant’s improvements without an investigation ever taking place is a breach of the implied covenant of good faith and fair dealing.2 In Amerigraphics, the tenants lessee was a printing and graphics design company which suffered a first party water loss arising from a defective water heater. The damages were not disputed but the insurance carrier delayed in paying certain benefits and did not investigate. Although the Amerigraphics case is better known as case law that deals with business interruption in California, the matter impacts and influences a tenant’s right to a proper investigation regarding what is owed under the business policy of insurance.