The popularity and convenience of shopping online is causing brick and mortar stores to go out of business or to consolidate locations. Sears & Kmart (46 Stores), Toys R Us (735 Stores), Bon Ton (256), and Sam’s Club (63 Stores) are just some of the national chains that have closed stores due to the online shopping surge in 2018. Local, independently-owned stores are also impacted by this trend, prompting additional closures. With businesses suddenly closing and no one to replace them, there has been an uptick in vacant commercial properties nationwide.
Commercial property insurance coverage is usually written on a special form, which means all causes of loss are considered covered to a certain extent unless excluded specifically in the policy. However, what happens if you own a commercial building where the sole tenant moves out after the lease is up, and you do not have another occupant to move in? Many would think that the building owner’s exposure drastically goes down because there are no tenant operations within the property, but that is not the case.
Most property insurance policies include a vacancy provision declaring that if a building has been vacant for a specific period of time and there is a loss, the policy will either provide no coverage for certain perils or the amount paid out will be reduced on all other causes of loss.
According to the standard ISO (Insurance Services Office) property coverage form (CP 00 10 10 12), vacancies can cause many coverage issues if it is not reported to the insurance agent in a timely manner so that the implications of vacancy can be thoroughly discussed and addressed.
The standard property insurance policy typically includes the following factors when determining whether a commercial property is to be deemed vacant:
- The building is vacant when it does not contain enough business personal property to conduct customary operations.
- The building is vacant unless at least 31% of its total square footage is:
- Rented to a lessee or sub-lessee and used by them to conduct its customary operations
- Used by the building owner to conduct customary operations.
- Buildings under construction or renovation are not considered vacant.
When a commercial property is determined to be vacant, gaps in coverage may occur due to the policy vacancy provisions. If a building has been has been vacant for more than 60 consecutive days before a loss or damage occurs, the insurance company will not pay for any loss or damage caused by any of the following, even if they are Covered Causes of Loss:
- Sprinkler leakage, unless you have protected the system against freezing
- Building glass breakage
- Water damage
- Attempted theft
With respect to the Covered Causes of Loss other than those listed above, the insurance company will reduce the amount they would otherwise pay for the loss or damage by 15%. Given that these vacancy provisions are embedded in a standard ISO property form, it is clear that a vacant property can be of concern.
So, why do insurance companies put this provision in the policy and what are the significant concerns they have with vacancy?
- Vacant properties are more inclined to be neglected or infrequently monitored. In addition, general maintenance and up-keep may be overlooked which can become an issue and generate preventable claims.
- When a low percentage of the building (30% or lower) is occupied, or perhaps 0% of the building is occupied, usually no one is consistently at the building. This makes the property more susceptible to vandalism, theft, attempted theft, and glass breakage.
- Another concern is that since the property is not occupied, adequate temperatures may not be maintained in order to save money; this leads to an increased risk for water pipes and sprinkler systems to leak or burst causing excessive damage.
How can a building owner solve a vacancy situation?
- Obtain a tenant to occupy at least 31% of the building.
- Commit to occupy at least 31% of the building and use it to conduct customary operations.
- Ask your insurance agent to see if the carrier will endorse a vacancy permit onto the policy. The vacancy permit might still include some limitations or exclusions.
- Work with your insurance agent to find a carrier that will write a vacant property policy. This option often comes with coverage limitations, restrictions, undesired exclusions, high deductibles, and can be very costly.
If you have additional questions about the impact of building vacancy on your insurance policy, please reach out your trusted advisors at Hausmann-Johnson Insurance.