7 minute read
VACANCY: HOW REMOTE WORK SHEDS NEW LIGHT ON AN OLD CONDITION
By Kevin C. Amrhein, CIC, CBIA
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- A common demand during America’s ‘Great Resignation’
Here are a few things you already know:
▲ In the last year, millions of people quit their jobs, turning some already-depleted workplaces into ghost towns.
▲ Of those employed, millions have resisted return-tooffice mandates, demanding a continuation of remotework policies indefinitely.
▲ A shift to remote work is contributing to soaring commercial office vacancies with no clear picture as to when/if they will recover.
Pivoting to a discussion on coverage, here are a few things you already know:
▲ Many standard commercial property insurers don’t like insuring vacant spaces.
▲ Insuring a vacant commercial property can be challenging, pricey, and from a coverage standpoint, lacking.
▲ If enforceable, a policy’s vacancy provisions are confusing and punitive.
Perhaps you count yourself among the few who know exactly how a vacancy condition is triggered and will apply to a loss. If not, you’re not alone. The number of inquiries I’ve received within the last year, many from industry pros whom I hold in high regard, has been staggering. It’s been a few years since I’ve written about this issue, and considering the continued decline of occupancy among the hardest-hit sectors of commercial property ownership – namely service (including office) and retail – I thought a refresher in order.
The form language cited in this article is from the ISO’s Building And Personal Property Coverage Form (CP 00 10 10 12).
LOSS CONDITION #6 – VACANCY
I’ve had the unique opportunity on many occasions to ask rooms full of people to say in a word or two what they think the word “vacant” means in general terms. Unsurprisingly, “unoccupied” is the most common response. When applied to the meaning of “vacant” as described in the policy, the good news is that they’re right.
The bad news is that they’re wrong.
Ummmm … huh?
While insureds won’t react well to any punitive insurance policy condition, expect frustration to be exacerbated when the condition seems to defy conventional wisdom. Considering what many people believe “vacant” means, this loss condition appears to do just that. Yuck.
We must prepare to meet resistance when explaining this condition. Due to the punitive nature of its enforcement at loss time, it’s imperative that our explanation is clear and acknowledged.
WHAT ‘VACANT’ MEANS WHEN THE INSURED IS A TENANT
Part a.(1)(a) of the vacancy loss condition states the following:
When this policy is issued to a tenant, and with respect to that tenant’s interest in Covered Property, building means the unit or suite rented or leased to the tenant. Such building is vacant when it does not contain enough business personal property to conduct customary operations.
In this subsection, a notable source of confusion is the undefined term “customary.” One can easily foresee an argument between the business owner and claims adjuster as to how much stuff is needed in the space for the business to operate. Should the latter be victorious, the space is considered vacant.
It’s worth noting at this point that, depending on the date the loss occurs, there may be no enforceable penalty. More on this later.
WHAT ‘VACANT’ MEANS WHEN THE INSURED IS A BUILDING OWNER OR GENERAL LESSEE
Part a.(1)(b) of the vacancy loss condition states the following:
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 sublessee and used by the lessee or sublessee to conduct its customary operations; and/or
(ii) Used by the building owner to conduct customary operations.
Perhaps most notable is the unusual square footage threshold percentage and the inevitable uncertainties over how precisely it’s to be measured. Further, the undefined term “customary” appears again in this subsection.
It’s within this form language that conventional wisdom is most obviously challenged. Specifically, it is entirely possible that an occupied building is considered vacant.
For example, consider a commercial building with four suites of equal square footage. Your insured owns the building and occupies one suite for office space. The other suites are rented to various tenants. Over time, the tenants non-renew and eventually all remaining suites are vacated, leaving the owner’s office as the building’s sole occupant. Only one fourth of the building’s square footage is occupied, falling short of the 31 percent threshold.
A NOTABLE CAVEAT: BUILDINGS UNDER CONSTRUCTION OR RENOVATION
Perhaps the insured feels confident that occupancy will not be an issue and decides to move forward with construction of its new commercial building. Or perhaps the insured took advantage of low interest rates/federal grant programs to make substantial renovations. In either case, the language in Part a.(2) ensures that the condition will not apply to a loss:
Buildings under construction or renovation are not considered vacant.
WAYS TO CHANGE WHAT ‘VACANT’ MEANS
Endorsements may be available. For example, ISO’s Vacancy Changes endorsement (CP 04 60) may be used to keep the vacancy condition dormant by decreasing the square footage requirement to as low as 10 percent. This endorsement would be an ideal solution for the owner of the four-suite building used in the prior example. Note that occupancy is a required trigger. Thus, a policy written for a building that is unoccupied would not benefit from this endorsement.
Another possibility is to request an endorsement commonly referred to as a vacancy permit. For example, some standard property insurers may offer a permit endorsement which keeps the vacancy condition dormant and allows the current cover to extend to an unoccupied building subject to additional terms and premium.
WHAT HAPPENS WHEN THERE’S A LOSS
Should a covered loss occur within 60 days of the building becoming vacant, there is no penalty. Should a covered loss occur at a building which has been vacant for more than 60 consecutive days, a punitive adjustment will be made to the amount payable. In some cases, the adjustment will reduce the amount payable by 15%. In other cases, the adjustment will reduce the amount payable to zero. The determining factor is the cause of loss as described in Parts b.(1) and b.(2):
If the building where loss or damage occurs has been vacant for more than 60 consecutive days before that loss or damage occurs:
(1) We will not pay for any loss or damage caused by any of the following, even if they are Covered Causes of Loss: (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.
(2) With respect to Covered Causes of Loss other than those listed in b.(1)(a) through b.(1)(f) above, we will reduce the amount we would otherwise pay for the loss or damage by 15%.
TAKEAWAYS FOR THE AGENT
To say the Vacancy Condition is punitive and will cause significant financial damage to the insured if applied to a loss settlement is entirely accurate. This thing is bad news.
Understand that the condition is impartial as to why the vacancy occurred. Whether it’s due to the newness of a recently completed building, horrible economic conditions, seasonal risks, or any other circumstance, the application of the condition is unchanged.
Reach out to property carriers to inquire about solutions such as endorsements designed to change the meaning of “vacant” and/or curb the severity of the condition.
Ensure that discussions with prospects and insureds address the condition and obtain acknowledgement that the policy’s interpretation of the term “vacant” supersedes any generally perceived meaning.
That’s all for now. Until the next round … cheers!
Kevin C Amrhein, CIC, CBIA is IA&B‘s education consultant. He works with our CISR and CIC programs, as well as our special topic seminars and live webinars. Catch him at one of our upcoming professional training offerings: IABforME. com/education.
