Does Commercial Property Insurance Cover Tenant Improvements?
- Nate Jones, CPCU, ARM, CLCS, AU
- Oct 13
- 3 min read
Tenant improvements can significantly enhance the value and functionality of a commercial space—but who insures them? In this blog, Wexford Insurance breaks down how commercial property insurance treats tenant improvements, who is responsible for coverage, and how to ensure you're fully protected.
What Are Tenant Improvements and Betterments (TIB)?
Tenant Improvements and Betterments (TIB) refer to permanent changes made by a tenant to a leased commercial space. These can include:
Built-in cabinetry or shelving
New flooring or wall finishes
Electrical or plumbing upgrades
Lighting installations
Partition walls or custom fixtures
Once installed, these improvements typically become part of the building and cannot be legally removed by the tenant when the lease ends. As such, they are considered part of the real property and often fall under the landlord’s ownership.
Does Commercial Property Insurance Cover TIB?
The answer depends on who owns the improvements and what the lease agreement specifies.
Landlord’s Policy
If the lease states that the landlord is responsible for insuring tenant improvements, the landlord’s commercial property insurance should include the value of those improvements in the building coverage. However, if the landlord fails to adjust the building’s insured value to reflect the added improvements, they may face a coinsurance penalty in the event of a claim.
Tenant’s Policy:
If the tenant pays for the improvements and the lease requires them to insure those upgrades, the tenant must include the value of the TIB in their Business Personal Property (BPP) coverage. The tenant’s insurable interest is considered a “use interest,” meaning they can insure the improvements for the duration of the lease.
How Are Tenant Improvements Valued in a Claim?
If tenant improvements are damaged and repaired promptly, the policy typically pays the actual cash value (ACV) or replacement cost, depending on the policy terms.
However, if the improvements are not repaired, the payout may be limited to the unamortized value—a prorated amount based on the remaining lease term. For example, if a tenant installs $500,000 in improvements during a 10-year lease and a loss occurs halfway through, they may only receive $250,000 if the improvements are not restored.
What If the Lease Is Terminated After a Loss?
In some cases, a lease may be canceled after a major loss, even if the tenant improvements are undamaged. If the tenant loses access to the space and cannot legally remove the improvements, they may lose their investment.
To protect against this, tenants can purchase Leasehold Interest Coverage, which reimburses the unamortized value of improvements if the lease is canceled due to a covered loss.
Best Practices for Landlords and Tenants
Review Lease Agreements Carefully: Clearly define who is responsible for insuring tenant improvements.
Adjust Coverage Limits: Ensure the value of improvements is included in the appropriate policy (landlord or tenant).
Use Endorsements: Consider endorsements like CP 04 26 for ordinance or law coverage and CP 15 31 for increased restoration periods.
Document Improvements: Maintain records of all upgrades, including costs and installation dates.
Consult an Insurance Expert: Work with a knowledgeable agency like Wexford Insurance to ensure your policy aligns with your lease obligations.
Final Thoughts
Tenant improvements can be a valuable investment—but only if they’re properly insured. Whether you’re a landlord or a tenant, understanding your responsibilities and coverage options is essential to avoid costly surprises.
Contact Wexford Insurance today to get a tailored commercial property insurance quote that protects your property and your tenants’ investments.
