VACANCY

(June 2019)

INTRODUCTION

All commercial property coverage forms and policies include a condition that limits or reduces coverage when a building is vacant more than a certain number of days. Coverage does not apply at all for certain causes of loss.

DEFINITIONS

Insurance companies want to insure only successful, ongoing businesses. This is why pricing is based on an active occupancy. Pricing is subject to a significant surcharge if a property is vacant. Vacancy is often not discovered until a loss occurs, so the coverage form severely restricts coverage if the vacancy is not disclosed prior to a loss.

Because of the penalties imposed on the insured, the coverage form defines exactly when a property is considered vacant. The definition depends on the insured’s relationship to the structure.

• Tenant

If the insured is a tenant and coverage applies only to its interest as a tenant of the property involved, the term "building" used in the vacancy condition is changed. "Building" means only the unit, suite, or space the insured occupies under a rental agreement or lease. This redefined building is considered vacant only when it does not contain enough business personal property for the insured to conduct its customary operations.

Example: Begley Office Building has ten tenants. Nine of them move out but Links, Inc. (which occupies 10% of the building) remains. Links' insurance policy considers the "building" occupied.

• Building Owner or General Lessee

If the insured owns the building or is a general lessee, building is defined as the entire building. The building is considered vacant unless at least 31% of the total square foot area is occupied. This occupancy can be through the property being rented by a lessee or sub-lessee that uses the building for its operations. The building owner can also occupy it for its own operations. The combined square foot area of the occupancies must be at least 31% of the building's total square foot area. The operations conducted must be those customary to the lessee, sub-lessee, and/or building owner.

131_C045, Vacancy Exclusion Held Applicable When Building Was Devoid Of Substantial Warehouse Contents

Example: Begley's insurance policy considers Begley Office Building to be vacant because only 10% of its total square foot area is occupied.

• Buildings under construction

Buildings under construction or renovation are not considered vacant.

Related Court Case: Extensive Renovation Qualifies Property For Vacancy Clause Exception

Example: Begley decides to totally renovate the building. As a result, it is considered occupied but under renovation and therefore not subject to the vacancy provisions.

VACANCY PROVISIONS

Now that vacancy is defined, the vacancy condition can be stated. If the building, as defined above, where the loss or damage occurs is vacant more than 60 consecutive days before the loss:

• The insurance company does not pay anything if the loss is caused by or results from vandalism, sprinkler leakage, breakage of building glass, water damage, theft, or attempted theft. There is one exception. If the insured protects the sprinkler system against freezing, the sprinkler leakage claim is covered subject to a 15% loss reduction.
• The insurance company reduces the loss amount by 15% if the claim is due to any other covered cause of loss or peril not listed above.

VACANCY EXAMPLES

Examples: A strip mall signs rental agreements with various tenants for approximately 40% of its space. However, only 10% of the mall is actually occupied at the time of loss. The building owner does not believe the mall is vacant because the rental agreements are in place. However, the insurance company disagrees because the tenants are not using the rented space to conduct their customary operations.

Scenario 1: Real Building, Inc. lost its major tenant. Pleasant Ridge Consulting had occupied the second through the sixth floors of the building. Real Building occupies the basement, three retail stores occupy the main floor and Tip Top Productions occupies the seventh floor. Because the space still rented and occupied is more than 31% of the total area, the building is not considered vacant under Real Building's policy.

However, Pleasant Ridge Consulting insurance policy will consider the space it previously occupied as vacant once it is unoccupied and vacant more than 60 days.

Scenario 2: Colonial Shopping Mall has one anchor store that occupies 50% of the mall's square foot area. The anchor store merged with another entity and Colonial is notified that the anchor store will close and vacate the space on May 1. However, the notice also states that it will honor its lease until it expires the following January. The other mall tenants become aware of the anchor store's departure and notify Colonial that they will also leave on May 1. As a result, only 20% of the mall is leased and occupied on May 1. In this case, the mall is considered vacant even though the anchor store still has inventory in the store.

Scenario 3: Pelican Processing’s building is both huge and expensive to heat. Through intelligent re-engineering of its operations, the Pelican now operates profitably in only 25% of the total square foot area. The rest of the building is not yet remodeled because the business does not know if it will be rented to others or used for expansion if the business continues to be successful.

Is Pelican’s building truly vacant? It is, according to the policy. However, if the insured begins renovating the remaining 75% of the building, it is not vacant. If a loss occurs, questions such as the definition of renovation, the extent of the renovations and the conditions that apply will certainly arise. Pelican may be adamant in thinking the building is fully occupied but the insurance company may be equally adamant that it is vacant, based on the vacancy condition. Situations like this should be discussed with underwriting and an agreement reached as to how any loss will be settled before a loss occurs. CP 04 60–Vacancy Changes described below, may provide a perfect solution.

Scenario 4: Pete purchases a parcel of land and builds an apartment building, anticipating the arrival of a new commercial enterprise nearby. Just as construction of the building is complete, the commercial enterprise declares bankruptcy. Pete manages to rent out only one of the 12 units. The building is considered vacant 60 days after construction ends if it does not have any additional tenants. Pete may encourage the builders to slow down and not rush to complete the job. He should also check the terms of the builders risk policy because coverage may end as soon as any occupancy is established.

VACANCY OPTIONS

CP 04 60–Vacancy Changes

This endorsement is helpful in the unusual situation where both the insured and the insurance company acknowledge that the definition of a vacancy in the coverage form or policy does not apply to the situation or is inappropriate. The two parties can agree in advance to a different occupancy percentage. The affected building is listed and a percentage between 10% and 30% entered on the endorsement schedule. This percentage replaces the 31% figure stated in the conditions. This endorsement is not usually subject to a premium charge.

CP 04 50–Vacancy Permit

This endorsement can be added for an additional premium charge if a building is vacant but the insured still wants full coverage on it. The building must be identified and the period of time that vacancy is permitted entered on the endorsement schedule. The time period cannot extend past the anniversary or expiration date, but it can be included on the inception date for the entire policy term.

Note: Because of concerns with vandalism and sprinkler leakage issues in vacant buildings, these causes of loss or perils can be excluded from the extended coverage the vacancy permit provides.