Member FAQ QUESTION: One of my commercial insureds is a tenant in a commercial building. Shortly after moving in, he installed a $50,000 floor. He bought flood insurance, but I’ve heard that coverage for a tenant’s improvements and betterments under the flood policy is different. How do I make sure his floor is properly covered for flood? ANSWER: 2) The building policy must be issued in the names of both building owner and tenant, with the tenant’s Contents policy remaining separate.
Great question. The flood policy does not always “behave” like a traditional property policy, and you need to know what your options are and make sure that you are in fact going to have coverage for the tenant. To do so, you need to review the General Rules (p. 13). The section addressing the improvements and betterments is section F1. Under the January 2013 manual, some slight revisions have been made, but the general setup is the same.
Note: Since the NFIP does not allow duplicate coverage, only one building policy can be issued. If that is the case, caution should be paid to the wording so that both parties can be properly indemnified; e.g. the policy could be issued in both names as their interests may appear.
The tenant can purchase coverage for the improvements and betterments under the Contents policy. The maximum amount available is 10 percent of the contents limit, which could very well be insufficient in your case; so you may have to increase the policy limits. The improvements and betterments will include such items as fixtures, alterations, installations and additions that become part of the building … nothing new here. The new floor would meet those criteria.
In your case, two hurdles must be cleared. A) The value of the improvements: Is the value of the floor going to be insurable under the Contents policy? B) The lease: What does the lease currently state? Does it meet one or both conditions above, in which case securing coverage under a separate building policy might be possible?
The tenant may purchase Building coverage to cover his or her insurable interest in the improvements and betterments only if certain specific conditions are met:
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1) The lease agreement signed with the owner must: a. require the tenant to purchase insurance for the tenant’s improvements and betterments made or acquired by the tenant; and/or b. state that the tenant is responsible for the repair of the building and/or improvements and betterments that become damaged.
1 This reflects the most current manual is available from http://www.fema.gov/flood-insurance-manual at the writing of this article. You can access the different sections separately, including the General Rules, to find the latest instructions.
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