By Jesse Harlan

Am I the Only One Who Thinks This Way?

“At least we have insurance on the place,” the owner thinks, trying to console himself while mentally tallying the smashed windows, stolen copper piping, ugly water-stained drywall, and spray-painted graffiti (not even close to being considered “art”). The break-in occurred around 6 p.m. in the once-bustling office park, and he angrily realized that it never would have happened seven months ago when the place was alive with activity.

I own a commercial property and I have insurance on it. Like many in my situation, it is easy to think that my policy is about the building, not about what’s going on with my tenants, that higher-than-normal vacancy rates don’t affect my insurance coverage. Oh, how wrong that thinking can be!

Unfortunately, during this unpredictable time of shifting demographics and increased vacancy, property owners don’t immediately think to call up their insurance agents and double-check coverage on an empty (or mostly empty) property. In this brief article, I hope to shift that thinking: The truth about insurance and vacancy is sobering and warrants our attention.

Vacancy and Why It Matters

Let’s take a look at the big picture. Insurance companies offer a policy based on the situation when it is presented to them, using all kinds of predictive tools about the local neighborhood, age of the building, distance to the local fire department, and so on. What they can’t anticipate is how that “risk profile” changes when there is nobody around.

Enter: Vacancy Provisions.

Think about your real estate portfolio. If no one is using the property on a regular basis, then it is less likely anyone will notice when something bad happens. It is also more likely that others (with nefarious intentions) will notice that people are around a lot less than they used to be. If no one is in the building on a regular basis, then no one will notice that the security light has been acting funny, that the alarm system reset in a power outage and is no longer armed, or that the heat hasn’t been working quite right.

You get the picture.

What Do You Mean by Vacancy?

Sure, if I have an empty shell of a property, I will probably remember to call my agent. But my building isn’t vacant – all of the suites are leased (true, they are working from home) and I still have one tenant in there every day. Does this even apply to me?

Well, it might.

Let’s get more specific. I’ll use a common insurance policy as an example, but the biggest takeaway is that we need to keep in close communication with our agents about this, because policies differ between companies. And unless you like reading insurance language for fun (like I do), that close relationship with your agent is key to making sure you don’t get surprised – in a bad way.

Many insurance policies define a vacant property in this way:

It is vacant unless at least 31% of the total area (square feet) is occupied.

But what do you mean by occupied? I mean, all the units are leased and they’ve got stuff in there, so that’s not vacant, right?

Well, that’s not enough. In order to be “occupied,” the units need to be used by your tenants to conduct their typical business activities. Now we might have a problem. Is that commercial office space devoid of anything but furniture, most importantly people? Are all the computers missing, parked in employees’ home offices? Does the tenant show up once a week just to collect their mail? Do they no longer see clients in that office but instead use Zoom from home, and they’re just waiting until their lease runs out?

How do you determine if you meet these thresholds? Well, it’s not a hard and fast rule, but which side of that risk do you want to be on?

An important note: Most policies consider properties under construction or renovation to be occupied, not vacant. So if your units are temporarily empty for that reason, you’re likely still in good shape.

Why is Vacancy Bad (for insurance)?

Okay, I’ll pay more attention to this. But what does it mean for my insurance if I have a vacant property (as you defined it)?
It will depend on your specific policy. But generally, after 30–90 days of vacancy, the coverages in the policy change.

• Many insurance companies say they won’t pay for any damage that happens from specific causes. One that might seem obvious: If no one’s around because the property is vacant, then theft, vandalism, and broken windows aren’t going to be covered.
• What else? What if that heat pump was going bad and no one told you because they were working from home? What runs through the sprinkler system? Freezing water could be a serious issue, and that may not be covered either.
• Then, beyond the list of “We won’t pay at all,” most policies reduce the amount they will pay for everything else.
• Finally, the fact that a property is vacant might allow your insurance company to cancel your policy with fairly short notice. Rushing to get a replacement within a week isn’t easy, and it’s certainly a hassle.

How Can We Fix the Problem?

Nice of you to point out the problem; what about a way to fix it? The good news is you can fix the vacancy-insurance issue. Here are a few places to start:

• Call your agent. It is critical to have a strong relationship with an agent who will read your policy and help you plan for these risks. Be careful here – not all agents take this as seriously as they should. Responses like “Nah, you’ll be fine” or “Everyone’s dealing with this, you’ll be okay” aren’t going to work at claim time. They are convenient for the agent, but not for you.
• Ask your agent to discuss it with the insurance company. Some companies might give you permission (get it in writing) to keep everything the way it is. Many offer a way to alter the policy and put you back in a full coverage situation, such as allowing you to decrease that 31% occupancy threshold, or extending the 30–90-day limit further out. One of these options might be perfect if you know the situation will be rectified in a few months.
• Get a quote for a Vacant Policy. There are insurance companies that focus specifically on providing coverage for vacant buildings. But be cautious here and ask your agent to walk you through the differences between this option and your current policy. Often these have more restricted coverage, meaning some things won’t be covered or the payout may be less at claim time.

A Few Closing Thoughts

When you own commercial property, there is no shortage of problems that demand your attention. As a commercial insurance agent, I’m well aware that questions like “What will happen to my policy if my building is less than 31% occupied?” cross your mind about as often as the spontaneous desire to read your insurance policy cover to cover.

But this is also the kind of thing that can turn an annoying claim situation into a devastating one. It’s my hope that you will call your agent (or find a new one if they aren’t helpful) and talk through these concerns. It’s my hope you’ll be on the front end, not the back end, of learning what vacancy means for your property insurance.

By Warren Stumpf

Insurance for retail shops, strip malls, shopping centers, manufacturers, and many other commercial entities seems to be straightforward; however, it is not. The coverage focus points for most are structures, contents, loss of earnings (business interruption), workers’ compensation, and comprehensive general liability. Then the conversation usually veers off onto other topics such as how to finance the premium payments.

Insuring the big items properly is critical and must be done with correct forms with the broadest terms and conditions possible with your agent advising you accordingly. With this being said, there is an area within the policy property section of businessowner’s and commercial package owner’s policies called “extensions of coverages” that should be reviewed, hopefully triggering additional exposure coverage questions.

My intent with this article is not to address each coverage extension with limits offered, but rather to point out several extensions I believe should raise a red flag to review with your agent. Not all insurance carriers’ forms are identical, but they are similar in their terms and conditions and intent.

The following extensions of coverage should be discussed with your agent to ensure you have adequate coverage beyond what is provided within your policy coverages.

Fences, Walks, Unattached Outbuildings: Do you have these exposures with limits higher than offered? For example, you may have installed a very expensive fencing system around your property that should have a separate and distinct limit. Basic limit provided is 10% of building structure value, not to exceed $25,000 for any one loss.

Merchandise in Shipment: Do you ship goods before you receive payment? If so, you may need a motor truck cargo coverage form in addition to this extension.

Refrigerated Property: Do you have refrigeration equipment on premises that stores your inventory? Be sure to include the inventory being stored in the refrigerated unit in your contents limit to address this costly exposure. An example: Your compressor for the refrigeration unit is damaged in a powerful storm. In the morning you arrive to find the contents of your refrigeration unit thawed and/or spoiled. This is why you need to reflect this inventory limit in your contents limit.

Building Ordinance or Law: This is maybe the most undervalued coverage on the policy. Do not rely on the extension of coverage alone. Due to ever changing ordinances, this should be added to every policy in the event of a loss. This is coverage for undamaged parts of the building and coverage for increased construction costs. For example, the ADA may now require ramps for access, restrooms to be renovated for wheelchair accessibility, doors repositioned and widened. Buildings may now be required to be sprinklered. These requirements could cost well into the hundreds of thousands of dollars. This item has to be addressed and insured separately under your policy declaration with much higher limits than is offered under the extensions of coverages. An example of this exposure: You own a large apartment complex and have a partial loss that affects a few of the units. The building was constructed prior to a building ordinance that requires automatic sprinkler systems. Now a building ordinance is in place that requires an automatic sprinkler be installed in every unit regardless of it being affected by the loss. This could be an extremely costly endeavor which could be covered by your building ordinance or law limit.

Employee Dishonesty: Do you have employees with check writing capacity or access to cash? If so, how many? A standard $10,000 limit is normally provided, but this may not be sufficient for your individual exposure. For example, if you directed one of your employees to make daily deposits and discovered money was missing, you must press charges to initiate coverage. After an investigation, your employee dishonesty coverage would be triggered.

Exterior Signs, Lights, Clocks: Do you have any of these that are not attached to the main structure? If so, they need to be scheduled with their value on the policy. The $5,000 standard extension may need to be increased depending upon the value of the structure.

Fine Art: Do you have any fine art? If so, you need to have it appraised, provide the list to your agent, and possibly schedule coverage onto your policy. Fine art can be extremely expensive. Some carriers cover $25,000 within the extensions of coverage. This may need to be adjusted to reflect the actual appraised value.

Money and Securities: Are you a cash and/or securities driven business, on and off premise? The standard limit of $10,000 needs to be addressed with your agent.

Data Breach Response Expense: Do you store your customers’ personal information on your computer? Address, date of birth, social security number, credit card numbers? Any of it, all of it? This is all critical information that can be stolen and data breach response expense is there to help, but your limits need to be addressed to provide proper protection. Data breach gives you peace of mind knowing you have the tools to help you respond to a data breach claim—expenses such as notifying affected individuals, legal and forensic costs, determining the extent of the breach, and services to help impacted individuals, such as credit monitoring.

Laptop, Notebooks, Handheld Computers Off Premise: Do you have any or all of these? You may have to increase this limit and include Electronic Data Processing coverage as well. The standard extension of coverage limit is $10,000. These items are referred to as temporarily off premises, which means they cannot be permanently off premises.

The extensions of coverage discussed above are the coverages I feel may have a greater risk of loss and therefore need higher limits and discussion of these exposures with your agent. Our underwriting process is to review with our insureds and prospects the big items and also the extensions of coverages. One of our insureds is a food processing plant. The extension of coverage limit for refrigerated products was not nearly sufficient. During our review, we increased their contents limit to reflect their high value of stored refrigerated contents. An ice storm caused severe damage of their refrigeration units, thereby destroying the contents. Since we had previously reviewed their limits and provided the proper coverage, the refrigerated contents were replaced.

You may have other areas of concern with property exposures that are not addressed by extensions of coverage. Bring these items to your agent’s attention in order to ensure proper coverage. Being aware of these exposures will enhance your loss control efforts and hopefully eliminate coverage concerns when a claim does arise.