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In commercial property insurance, tenants’ fixtures and fittings often fall into a grey area, leading to confusion and underinsurance. Misunderstandings around responsibility between landlords and tenants can result in significant gaps in cover and potentially denied claims. CIA provides a useful interpretation of this cover.

Unclear Responsibilities

Many tenants mistakenly believe that all fixed items, including any improvements or additions they make to the premises, are automatically covered under the landlord’s policy. On the other hand, landlords may assume that anything installed or added by a tenant is the tenant’s sole responsibility. This lack of clarity can leave critical items uninsured, as neither party has correctly arranged cover.

Overlooked During Lease Negotiations

Lease negotiations often focus on occupancy terms and rental rates, but fail to fully address insurance responsibilities for tenant-installed improvements. Tenants may install custom features such as counters, shopfitting, or partition walls without confirming that these are covered under their own policy. While many leases do state that the tenant is responsible for such items, tenants may not always understand this to mean they need separate insurance.

It is also common for leases to state that any fixture or fitting added by the tenant becomes the property of the landlord upon lease expiry. However, the transfer of ownership—and therefore insurable interest—only occurs once the tenant has vacated the premises and the lease has formally ended. Until then, the tenant remains responsible for insuring these improvements.

Ambiguity Between Fixtures and Contents

The distinction between fixtures and contents is not always straightforward. For example, is a bolted-down shelf a fixture or is it contents? Without clear definitions in the lease or insurance schedule, such items may fall into a grey area. This ambiguity can lead to claim disputes, with insurers potentially rejecting claims if an item is not explicitly covered under the correct policy.

Equipment Leased Under Rental Agreements

Tenants may install equipment that is subject to a separate rental or lease agreement, such as rented solar panels, cash handling machines, or safes. In such cases, the lease agreement for the equipment may place the responsibility for insurance on the tenant. These items must be specifically listed and insured under the tenant’s schedule of fixtures and fittings. Even when the landlord and tenant entities are controlled by the same person, if they are separate legal entities, insurance must treat them as distinct parties. Each entity can only insure what it legally owns or is contractually responsible for.

How This Affects Tenants’ Fixtures and Fittings

Insurable interest is a fundamental principle of insurance. An entity may only insure assets that it owns or is legally responsible for. In the case of commercial properties, the landlord entity owns and insures the building structure. The tenant, by contrast, is responsible for any fixtures and fittings it installs during the lease term.

Policy setup must reflect this division. The landlord’s insurance should cover the base building, while the tenant must ensure their own improvements—such as shopfitting, built-in counters, and partitions—are insured. These can be covered under the tenant’s own policy or included in the landlord’s policy as optional cover, provided they are specifically declared and valued correctly. An additional premium will typically be payable.

Claims and settlements will be assessed based on which legal entity has suffered the loss. If tenant improvements are not correctly insured and a loss occurs, the tenant could be left without any recourse, even if the same individual owns both landlord and tenant companies. Insurance does not follow individual control; it follows legal ownership and contractual responsibility.

The lease agreement must be clear and specific about who is responsible for insuring which parts of the property. It should also clearly reflect whether tenants’ improvements must be insured by the tenant or included under the landlord’s policy. Too often, property owners assume that because they control both entities, cover automatically applies across the board. Unfortunately, this misconception can result in claim repudiations.

The Solution

To avoid the risks of underinsurance or denied claims, tenants’ fixtures and fittings should be specified at their full replacement value, as specified in the lease agreement. This ensures that the correct party is protected and that the premium paid reflects the full extent of the insurable interest.

Speak to one of our professional advisors today to ensure you have this cover in place.