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During and after the pandemic, everyone with more than a piggy bank and a bicycle was affected. Though the economy is healthy now, the commercial real estate market likely has changed forever due to many people working from home at least part time.
For property owners and insurance companies alike, vacant property creates many challenges. Vacancies pose a greater risk of loss due to fire, water damage, theft and vandalism. In addition, there are liability exposures for people who may be injured on a vacant property. Because of these greater risks, it’s important to know that most property insurance policies contain vacancy clauses that dramatically affect coverage if the building is deemed vacant.
When is a property considered vacant and when is it considered unoccupied? There is a difference.
As cited in a property insurance law blog, “Courts have long defined ‘vacant’ in insurance policies as meaning empty of inanimate objects – as opposed to ‘unoccupied,’ which they have defined as being void of human habitation.”
While this definition has been disputed in the courts, the most current policy forms agree that occupancy needs to reflect a viable business operation. Policyholders can no longer call a space occupied merely because they moved in a desk and a couple old file cabinets to suggest they’re storing property.
When a policy is issued to a tenant, it’s considered vacant when it doesn’t contain enough business property to conduct customary operations.
When a policy is issued to an owner or general lessee, it’s considered vacant unless at least 31% of its total square footage is used by the building owner to conduct customary operations.
While the provisions seem relatively clear cut, there have been court challenges to the vacancy provisions as they relate to a fire loss. This is because the insurance industry considers the perils of fire and vandalism as separate causes of loss. Depending on the scope of operations, coverage can be voided completely or the values reduced if the insurance company is not made aware of the occupancy status in advance.
How can you be sure your vacant property is fully protected?
Even in the midst of a more robust economy and greater demand for commercial property, vacancies still exist and continue to create challenges.
While agents and clients review property values and other data on an annual or ongoing basis, it’s equally important to discuss the potential for a property to become either vacant or unoccupied. This applies to any type of business – not just commercial real estate owners.
Manufacturing and industrial facilities face the same challenges when owning or leasing vacant or unoccupied property.
Due to the court’s ambiguity of how vacancy has been interpreted, the best course of practice is to make our clients aware of how their policy could respond and negotiate options in advance with the insurance company.
This article originally appeared in 2018 and has been updated.
Please contact us with any questions or concerns because we see risk so you see opportunity.
