As the economy continues to struggle, property managers and property owners may find themselves with an insurance dilemma on their hands when tenants move out. Is my building vacant, or is it unoccupied? What does that mean if I have a claim?
Is there a difference? When it comes to insurance, yes, there is a difference. You and your insurance carrier likely do not define these terms in the same way, so it is important to know the difference.
Unoccupied Doesn’t Mean Empty
Insurance companies define unoccupied buildings or spaces as owned, rented or leased units that contain contents but no people occupy them on a regular basis. This can refer to a second or vacation home or a secondary office space.
If a building becomes unoccupied and stays that way for more than 90 days, the property insurance coverage in place on the property may be reduced. The amount of coverage and the perils insured against may both be affected, and changes are dependent on the policy term and conditions.
The Building Can Be Vacant Even With Tenants
According to the Insurance Services Office (ISO) Building and Personal Property Coverage Form (CP 00 01 04 02), vacancy is defined in one or more of these ways:
A rented or leased building or unit is considered vacant when it does not contain enough personal property to conduct customary business operations.
An owned building is considered vacant when less than 31% of the total gross building square footage is not rented or leased to a tenant and used for customary business operations or used by the building owner to conduct customary business operations.
To be more clear, even if your building has tenants in it, if there aren’t enough of them and they aren’t there on a regular basis, the building can be considered vacant. The vacancy provision in the property will usually kick in after 60 days of vacancy, resulting in reduced coverages, limits, or both.
Your Insurance Coverages Will Change
If your building doesn’t have enough tenants or customary operations being performed inside, your property insurance policy coverages may change or even cease. Most policies include a vacancy provision stating that after a certain period of time (usually 60-90 days) unoccupied or vacant, the carrier will no longer pay claims for the following perils:
- (a) Vandalism
- (b) Sprinkler leakage, unless you have protected the system against freezing
- (c) Building glass breakage
- (d) Water damage
- (e) Theft; or
- (f) Attempted theft
In addition, most policies will reduce the amount of payment for a covered cause of loss by 15% or more. This means if a $10,000,000 building is only 25% occupied at the time of a sudden catastrophic loss like a fire, the policy would only pay out $8,500,000 less the policy deductible.
In some cases the vacancy provision of the policy may even result in cancellation of the policy. You should call your broker to find out how your insurance coverage may be affected.
It Does Matter
While it might seem unfair that the coverage you pay for can be reduced due to vacancy or lack of occupants, it really does matter to the insurance company. An unoccupied or vacant building has a much different life cycle than an occupied one:
Less occupancy results in less traffic in and out of an insured building. →
Less traffic results in less maintenance to the building →
Less maintenance makes the building more susceptible to damage →
More damage creates an attractive nuisance that invites vandals, transients,and other unwelcome guests.
In December 2011 a building owner filed an insurance claim when his building burned down. The building had been vacant since February 2010 (22 months). The fire department and claims investigator determined that the fire had started as a warming fire created by transients occupying the building without authorization. The fire spread out of control, causing a total loss. The insurance company initially denied the claim because the fire was deemed an act of vandalism, which was excluded from coverage since the building had been vacant for more than 30 days. In April 2015 an appeals court ruled that the insurance company should pay, since the fire wasn’t intended as vandalism. The 15% coverage reduction rule would still apply.
All of these increase the likelihood of a property insurance claim on the unoccupied or vacant property. Since your insurance carrier cannot increase premiums midterm, the coverages need to be reduced to reflect the higher risk.
The good news is there are policies available for unoccupied or vacant buildings. These are especially helpful if the property will be at less than capacity for a long period of time or during an ownership transition such as a sale or foreclosure. Short term policies are also available. Contact your broker for more information.