(June 2013)
INTRODUCTION
All commercial property
coverage forms and policies include a condition that limits or reduces coverage
when a building is vacant more than a certain number of days. Coverage does not
apply at all for certain causes of loss.
DEFINITIONS
Insurance companies want
to insure only successful, ongoing businesses. This is why pricing is based on
an active occupancy. Pricing is subject to a significant surcharge if a
property is vacant. Vacancy is often not discovered until a loss occurs. This
is why conditions in the coverage form severely restrict coverage if the
vacancy is not disclosed prior to a loss.
It is important to
determine exactly when a building is vacant. Because of the penalties imposed
on the insured, the coverage form defines exactly when a property is considered
vacant. This depends on the insured’s relationship to the structure.
If the insured is a tenant and
coverage applies only to its interest as a tenant of the property involved, the
term "building" used in the vacancy
condition is changed. "Building" means only the unit, suite, or space
the insured occupies under a rental agreement or lease. This redefined
"building" is considered vacant only when it does not contain enough
business personal property for the insured to conduct its customary operations.
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Example: Begley Office Building has ten tenants. Nine of them
move out but Links, Inc. (who occupies 10% of the building) remains. Links'
insurance policy considers the "building" occupied.
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- Building Owner
or General Lessee
If the
insured owns the building or is a general lessee, building is defined as the
entire building. The building is considered vacant unless at least 31% of the
total square foot area is occupied. This occupancy can be through the property
being rented by a lessee or sub-lessee that uses the building for it
operations. The building owner can also occupy it for its own operations. The
combined square foot area of the occupancies must be at least 31% of the building's
total square foot area. The operations conducted must be those customary to the
lessee, sub-lessee, and/or building owner.
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Example: Begley's
insurance policy considers Begley Office Building to be vacant because
only 10% of its total square foot area is occupied.
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- Buildings
under construction
Buildings under construction or renovation are not
considered vacant.
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Example: Begley decides
to totally renovate the building. As a result, it is considered
occupied (but under renovation) and not subject to the vacancy provisions.
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VACANCY PROVISIONS
Now that vacancy is
defined, the vacancy condition can be stated. If the building as defined above
where the loss or damage occurs is vacant more than 60 consecutive days before
the loss:
- The insurance company does not pay anything if the
loss is caused by or results from vandalism, sprinkler leakage, breakage
of building glass, water damage, theft, or attempted theft. A sprinkler
leakage claim is subject to only a 15% loss reduction if the insured protected
the sprinkler system against freezing.
- The insurance company reduces the loss amount by 15%
if the claim is due to any other covered cause of loss or peril not listed
above.
VACANCY EXAMPLES
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Example: A strip mall signs rental agreements with various
tenants for approximately 40% of its space. However, only 10% of the mall is
actually occupied at the time of loss. The building owner does not believe
the mall is vacant because the rental agreements are in place. However, the
insurance company disagrees because the tenants are not using the rented
space to conduct their customary operations.
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Example: Real Building, Inc. lost its major tenant. Pleasant
Ridge Consulting had occupied the second through the sixth floors of the
building. Real Building occupies the basement, three retail stores occupy the
main floor and Tip Top Productions occupies the seventh floor. Because the
space still rented and occupied is more than 31% of the total area, the
building is not considered vacant under Real Building's policy.
However, the Pleasant
Ridge Consulting policy treats the space it previously occupied as vacant
once it is unoccupied and vacant more than 60 days.
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Example: Colonial Shopping Mall has one anchor store that
occupies 50% of the mall's square foot area. The anchor store merges with
another entity and Colonial is notified that the anchor store will close and
vacate the space on May 1. However, the notice also states that it will honor
its lease until it expires the following January. The other mall tenants
become aware of the anchor store's departure and notify Colonial that they
will also leave on May 1. As a result, only 20% of the mall is leased and occupied on May 1. In this case,
the mall is considered vacant even though the anchor store still has
inventory in the store.
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Example: The building is both huge and expensive to heat. Through
intelligent re-engineering of its operations, the business now operates
profitably in only 25% of the total square foot area. The rest of the
building is not yet remodeled because the business does not know if it will
be rented to others or used for expansion if the business continues to be
successful.
In this case, is the
building truly vacant? It is, according to the policy. However, if the
insured begins renovating the remaining 75% of the building, it is not
vacant. If a loss occurs, questions such as the definition of renovation, the
extent of the renovations, and the conditions that
apply will certainly arise. The insured may be adamant in thinking the building
is fully occupied but the insurance company may be equally adamant that it is
vacant, based on the vacancy condition. Situations like this should be
discussed with underwriting and an agreement reached as to how any loss will
be settled before a loss occurs.
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Example: Pete purchases a parcel of land and builds an apartment
building, anticipating the arrival of a new commercial enterprise nearby. Just
as construction of the building is complete, the commercial enterprise
declares bankruptcy. Pete manages to rent out only one of the 12 units. The
building is considered vacant 60 days after construction ends if it does not
have any additional tenants. Pete may encourage the builders to slow down and
not rush to complete the job. He should also check the terms of the builders
risk policy because coverage may end as soon as any occupancy is
established.
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VACANCY OPTIONS
CP 04 60–Vacancy Changes
This endorsement is
helpful in the unusual situation where both the insured and the insurance
company acknowledge that the definition of vacancy in the coverage form or
policy does not apply to the situation or is inappropriate. The two parties can
agree in advance to a different occupancy percentage. The affected building is
listed and a percentage between 10% and 30% entered on the endorsement
schedule. This percentage replaces the 31% figure stated in the conditions.
This endorsement is not usually subject to a premium charge.
CP 04 50–Vacancy
Permit
This endorsement can be
added for an additional premium charge if a building is vacant but the insured
still wants full coverage on it. The building must be identified and the period
of time that vacancy is permitted entered on the endorsement schedule. The time
period cannot extend past the anniversary or expiration date but it can be
included on the inception date for the entire policy term.
Note: Because of
concerns with vandalism and sprinkler leakage issues in vacant buildings, these
causes of loss or perils can be excluded from the extended coverage the vacancy
permit provides.
