Vacancy Rates Can Reduce Or Eliminate Insurance Coverage
In today’s economic conditions, commercial property owners in great numbers are facing substantially high vacancy rates. The vacancy situation itself is more than enough to cause concern for property owners, but there could be an additional hidden trap in insurance policies that could spell financial catastrophe.
Typically, under a commercial property policy, coverage is significantly restricted for buildings that are vacant beyond a certain period of time. Usually, certain types of coverage are completely eliminated during the vacancy. Continued, full coverage often requires additional premium and the attachment of an endorsement indicating the insurer’s acceptance of the increased risk.
Insurance companies are interested in protecting ongoing businesses and premiums are based upon active occupancy. Therefore, if a property is vacant there is a considerable increase in its coverage cost. Since vacancy is often only discovered after a claim, the typical commercial property policy’s Loss Conditions severely limit coverage when a vacant building has suffered damage.
Definitions
Before any restrictions can be imposed, the insurance company must define exactly what they mean by vacancy and the definition is affected by the type of occupancy:
Tenant - When the insured is a tenant and the policy covers that insured’s property interest, the definition of building is the unit or suite that has been rented or leased to the tenant. That building is considered vacant when it no longer contains enough business personal property to conduct the customary operations of the insured tenant.
Building Owner Or General Lessee - When the insured is a building owner or general lessee, building is defined as the entire building. The building is considered vacant UNLESS at least 31% of the TOTAL square footage is rented to a lessee or sub-lessee and used by the lessee or sub-lessee to conduct its customary operations OR is used by the building owner to conduct customary operations.
Buildings Under Construction – Buildings that are under construction or renovation are not considered to be vacant.
Vacancy Provisions
Now that vacancy has been defined, the vacancy condition can be stated. If the building where loss or damage occurs has been vacant (see definition above) for more than 60 consecutive days before the loss:
the insurance company will pay NOTHING if the loss was caused by vandalism, sprinkler leakage, glass breakage, water damage, or theft (including damage from attempted theft). the insurance company will reduce any loss amount by 15% if the claim is due to any Covered Cause of Loss not listed above.
The vacancy exclusions and limitations may be even stricter in reducing or eliminating coverage or allow for only 30 days before the carrier considers the property as vacant.
Vacancy Permit
When vacancy does occur, many companies, for an additional premium, will add a provision (sometimes called a Vacancy Permit). This form changes the policy wording so that it provides coverage for the property during specific time periods that it is vacant.
Court Case: Pappas Enterprises, Inc. & others v. Commerce and Industry Insurance Company–Supreme Judicial Court of Massachusetts, Suffolk–February 14, 1996–661 North Eastern Reporter 2d 81.
Sixty-Day Vacancy Period Spans Two Policy Terms
Pappas Enterprises, which owned numerous properties in the Boston area, had secured fire coverage from Commerce and Industry Insurance Company. On September 1, 1990, the insured renewed their policy which had been in continuous force since September 1, 1988.
On October 27–57 days after the effective date of the current policy–one of the properties was damaged by fire. Commerce was notified and found that the property had been vacant since May 1989–a period in excess of one year. It denied coverage, and the insured filed suit.
The insured’s policy excluded property coverage for a loss occurring while the insured premises were vacant or unoccupied beyond a period of 60 consecutive days. The insured argued that the property had been vacant for only 57 days under the current policy. The company contended that the 60-day vacancy could also include consecutive days of vacancy during the prior policy period.
The trial court found that there was no controlling Massachusetts authority, and cases decided elsewhere were not applicable to all the circumstances of this case. Also, if the provision was ambiguous, the ambiguity was in every fire policy written in the state. The judge certified two questions to the Supreme Judicial Court of the state:
1. Does the 60-day vacancy provision for fire policies apply in cases where part of the 60-day period occurred prior to the effective date of the current policy?
2. If not, would the result be different if the current policy was a renewal of the previous policy, and part of the 60-day period occurred prior to the renewal?
The higher court decided that the consecutive days of vacancy prior to the effective date of the current policy could be counted only if the current policy was a renewal of substantially the same coverage provided in the prior policy.
The court answered the first question in the negative because the vacancy exclusion does not apply when the loss occurred within 60 days of the effective date of the current policy, assuming there was no prior policy with the same coverage.
The second question was answered in the affirmative. Thus the court decided that a vacancy period of a prior policy period should be tacked on to the vacancy continuing through the subsequent policy period, if the subsequent policy was a renewal of the prior policy with no substantial change in coverage. The decision was made in favor of the insurer.
The court noted that the insurance company agreed to assume the increased risk during a 60-day vacancy and not during a period of a vacancy lasting more then 60 days.
About the author
Eric Paulos is a Certified Insurance Counselor, apartment owner advocate, licensed California insurance agent, author and speaker. Eric Paulos Insurance Services caters exclusively to the apartment owner community, offering insurance and risk management services. Contact phone: 800-974-6787 Fax: 800-959-9603, Email: eric@apartmentins.com. Visit www.apartmentins.com for 24 hour a day, 7 day a week online quotes. Download free money-saving articles and reports. Apartment Management readers are also invited to log on for a free subscription to Eric Paulos Insurance Services’ monthly apartment insurance tips & bulletins.