Vacant properties, evolving risks and available coverage

A slow economy or sudden downturn in the markets can leave many commercial property owners and managers with the prospect of maintaining vacant buildings.  Whether it’s a reduction in work force or tenants/businesses having to move to more affordable housing/retail space, many commercial property owners are faced with this current reality and should understand the risks involved and coverage available during periods of vacancy.

But first things first, let’s look into the actual definition of the word vacancy.  In the dictionary, vacancy is typically defined as “being without content or occupant” however most insurance policies define the word from a different perspective.  Building and Personal Property Form CP 00 10 states the terms as follows:

“When this policy is issued to the owner or general lessee of a building, building means the entire building.  Such building is vacant unless at least 31% of its total square footage is:

 (i) Rented to a lessee or sub-lessee and used by the lessee or sub lessee

to conduct its customary operations; and/or

(ii) Used by the building owner to conduct customary operations

Buildings under construction or renovation are not considered vacant.”

The coverage provided for the above terms varies and can be amended or supplemented according to your needs in the event your building becomes vacant.

Many policies will exclude coverage (or pay only a percentage) for a loss or damage, if the building where the loss occurred has been vacant for more than 60 days prior to the event of loss.  Being aware of the vacancy and communcation with your insurer are best practice when dealing with an unused space.  A thorough review of your commercial policy and the terms applicable to your property is crucial at this juncture as well.  Vacant buildings may require additional coverage (along with additional premiums) due to the higher exposure of risk or damage that is inherent within.  At this point you’ll also want to look into the vacancy provisions (if any) embedded in your policy.  Many insurers have stopped including vacancy clauses in their policies due to the changing nature of the risk and are prepared to underwrite the exposures separately, without any reduction in coverage.  Policy endorsements that suspend some or all of the coverage restrictions that apply to buildings that have been vacant for more than 60 days can be purchased additionally at a premium.

While in the past, most vacant buildings were commercial or industrial buildings (that eventually posed a threat to public safety); today’s definition could include loss of rents/tenants due to an economic downturn.  As an example, a building owner could lose major tenants and have a lengthier period of vacancy as the demand for said property is in current decline due to an economic recession.  Vacant buildings may also include brand new, state of the art structures that developers find difficult to sell due to less than ideal markets or a slow economy as a whole.  These current side effects of our economy all add up to a changing environment for commercial building owners/managers when dealing with vacancy risks.  A fresh initiative and policy review in regards to this very real risk could prove to be an indispensable pro-action that ensures you are properly covered in the event of this type of loss.  Vacant building losses can create complex and difficult settlement situations as the overall policy coverage can be decreased by the vacancy itself.   As always it is best practice to review your coverage and adjust accordingly.  Slight premium increases are a small price to pay for the proper coverage in light of the risks of going forward unprepared and unprotected in regards to vacant properties.