Everyone Knows What That Is (Or Do They?)
When the U.S. economy tanked in 2007, everyone with more than a piggy bank and a bicycle was affected. Notable among the casualties, the commercial real estate market was significantly impacted. Demand for office space plummeted as employers were forced to shed payroll. While U.S. office vacancy rates soared to 17.4%, decreasing rental revenue–for all types of real estate–sent properties into bankruptcy and led developers to default on loans. The end result was increased vacant and unoccupied space nationwide. This got the attention of the insurance marketplace.
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 which dramatically affect coverage if the building is deemed vacant.
But when is a property considered vacant, when is it considered unoccupied, and did you know there’s 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.”1 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 the peril of 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 in 2018. While agents and clients review property values and other data on an annual or on-going 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. Your Oswald team is here to make sure your vacant property includes the necessary endorsements to protect your valuable assets.
Please contact us with any questions or concerns because we see risk so you see opportunity.
Susan Tobbe is a Senior Client Manager, Team Leader in Oswald Companies’ commercial Property & Casualty division. With over 20 years in the field, she has a broad range of experience that includes a specialized focus on real estate accounts of all sizes. Equipped with strong research skills, Susan is adept at insurance policy analysis and comparison.