Tenants’ improvements: who insures the fit-out

The gap between two policies

Commercial premises insurance divides along a simple line: the landlord insures the building; the tenant insures its contents. The fit-out sits awkwardly across that line. Partitioning, suspended ceilings, raised floors, bespoke joinery, kitchens and washrooms installed by the tenant, data cabling, air conditioning the tenant added — all of it is fixed to the building, so it is not contents in the ordinary sense; but it was not part of the building the landlord let, so the landlord’s buildings policy and its reinstatement valuation frequently ignore it.

The result is a class of property with no natural home. Insurers solve it with a specific item: tenants’ improvements and betterments (or landlord’s fixtures and tenants’ improvements), written into the tenant’s policy — usually within an office or commercial package — with its own sum insured. Where the item is missing, or nominal, the gap stays open until a loss finds it.

What the lease says governs

Who should insure the improvements is a lease question before it is an insurance question, and leases answer it in different ways. Some define the demised premises to include tenant’s fixtures and improvements, pulling them into the landlord’s insuring obligation — in which case the tenant should confirm the landlord’s sum insured actually reflects the fit-out value, since the landlord may not know what was spent. More commonly, the landlord’s obligation is confined to the building as originally demised, and the lease — expressly or by silence — leaves improvements with the tenant. Yield-up and reinstatement clauses then complete the picture: the tenant is typically obliged to keep the premises (including its improvements) in repair and to reinstate after damage, which means the tenant carries the cost of rebuilding the fit-out whether or not it insured it.

Reading the insurance, repair and yield-up clauses together — and matching the tenant’s policy to what they require — is the whole exercise. Assumptions imported from the last premises are the usual source of error, because no two leases split the line identically.

Getting the sum insured right

Tenants’ improvements should be insured at reinstatement cost — what it would cost to strip out and rebuild the fit-out today, including design fees, compliance with current Building Regulations, and VAT where it is not recoverable — not at the depreciated accounting value on the balance sheet. Fit-out costs inflate with construction costs generally, and a figure set at lease commencement drifts below reality within a few years. Underinsurance matters here as everywhere: commercial property items are subject to average, so a fit-out insured at half its reinstatement cost produces half a claim.

Worth insuring alongside: the interaction with business interruption. A destroyed fit-out is rebuilt inside the landlord’s repair timetable but by the tenant’s own contractors, and the tenant’s BI indemnity period and sums should assume the fit-out rebuild, approvals and re-occupation sequence — not just the landlord’s structural works.

Common failure patterns

The ones we see repeatedly: the fit-out was capitalised and forgotten, so the improvements item is still the placeholder figure from the original package quote; a major refit doubled the exposure mid-term and nobody told the broker; the lease obliges the landlord to insure improvements but its declared reinstatement value has never included them; the tenant assumed the landlord’s policy covered everything fixed, and discovers after the escape of water that “the building” meant the building as at the lease date; or subrogation — the landlord’s insurer pays for the building and pursues the tenant for the damage, an exposure managed by the lease’s insurance provisions and by the tenant’s liability covers, and another reason the lease needs reading rather than guessing.

How Apex approaches it

For every office and commercial package we place for a tenant, the questions are standard: what does the lease oblige each party to insure and to reinstate; what did the fit-out actually cost and what would it cost to rebuild today; is the improvements item present, separately identified and indexed; and does the BI programme assume the real re-occupation timeline. It is unglamorous work that converts a six-figure gap into a schedule line costing very little.

Frequently asked questions

Are tenants’ improvements covered by the landlord’s buildings insurance?

Usually not. Most landlord policies insure the building as originally demised, and the reinstatement valuation rarely includes fit-out the tenant installed. Unless the lease expressly brings improvements within the landlord’s insuring obligation — and the landlord’s sum insured reflects them — the tenant should insure them under its own policy.

Are tenants’ improvements the same as contents?

No. Contents cover applies to property not fixed to the building — furniture, equipment, stock. Improvements are fixed: partitions, ceilings, flooring, cabling, installed kitchens. They need their own item, commonly called tenants’ improvements and betterments, with a separate sum insured at reinstatement cost.

What sum insured should we use for the fit-out?

Full reinstatement cost today — strip-out, rebuild, professional fees, current Building Regulations compliance, and irrecoverable VAT — not the depreciated book value. The item is subject to average, so underinsurance reduces any claim proportionately.

The lease says we must reinstate after damage. Does that change anything?

It makes the cover more important, not less: a reinstatement obligation means the tenant bears the rebuild cost of its improvements whether or not they are insured. The insurance, repair and yield-up clauses of the lease should be read together and the policy matched to what they require.

Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority (FRN 724952). This page is general information, not advice on a specific policy.