Vacant Commercial Property Insurance Exclusions and How to Restore Coverage

While the lockdowns and stay-at-home orders enacted throughout the nation last spring are now parts of our pandemic past, many businesses remain closed — some hoping to reopen, others having closed their doors for good. Owners and tenants of buildings that are unoccupied or lacking sufficient personal property to conduct business as usual should be aware of the vacancy clause in their Commercial Property insurance policy and protect themselves with a Vacancy Permit endorsement.

Unfortunately, the number of policyholders in need of this endorsement continues to grow.

In Silicon Valley alone, office vacancy rates hit a pandemic high of 9.4% in the first quarter of 2021, up 3.5% from the same quarter a year earlier. Since that 5.9% vacancy rate, quarterly figures have climbed steadily — to 6.5%, 7.4% and 8.2% before reaching the most recent rate.

While federal relief efforts, improved economic statistics and increasing rates of COVID-19 vaccination are causes for optimism that the remainder of 2021 will be far better than 2020, economists expect the trend in commercial property occupancy to continue downward into 2022.

Thomas LaSalvia, a senior economist with Moody’s Analytics, recently told the Associated Press (AP) to expect higher vacancy rates for the remainder of this year, with owners of retail and office property likely to be the hardest hit. “We see such potential and plenty of anecdotes and early data of actual shifts in how we work and how we shop,” LaSalvia said. “The structural changes that are going on still give us pause to say that we’ve entered a recovery in terms of office or retail.”

Due to the rise in online shopping — already climbing before the pandemic, online commerce has soared since the advent of COVID-19 — Moody’s anticipates retail vacancy to reach 25% nationally by 2025. Office vacancies, are expected to reach 20% in 2022 then decline to about 17% by the end of the decade, LaSalvia told the AP.

Along with Silicon Valley, cities such as Houston, San Francisco, Los Angeles, New York, Chicago and Washington have been among the hardest-hit locations during the office slump, according to Wolf Richter of the Wolf Street website.

Any need for additional insurance coverage in the form of a Vacancy Permit endorsement completes a triple whammy for commercial property owners who had already lost tenants and absorbed rate increases on their Commercial Property coverage amid an overall hard market for Property and Casualty Insurance.

What Is the Vacancy Clause? 

The standard Insurance Services Office (ISO) Building and Personal Property Coverage Form and most proprietary Commercial Property forms include a vacancy clause in the “Conditions” section. The ISO clause begins by defining “building” and “vacant.”

  • For a tenant, with respect to covered property, “building” is defined as the “unit or suite rented or leased by the tenant,” while “vacant” means the rented or leased space “does not contain enough business personal property to conduct customary operations.”
  • For an owner or general lessee, “building” means the entire structure. The building is considered vacant “unless at least 31% of its total square footage is:
  1. “Rented to a lessee or sublessee and used by the lessee or sublessee to conduct its customary operations; and/or
  2. “Used by the building owner to conduct customary operations.”

The ISO does not consider buildings under construction or renovation to be vacant.

What constitutes “customary operations,” meanwhile, may be subject to interpretation and is frequently determined in court.

Under “Vacancy Provisions,” ISO property forms exclude coverage of loss or damage in a building that “has been vacant for 60 consecutive days before the loss or damage occurs” (bold type added here for emphasis). This includes loss or damage caused by:

  • Vandalism
  • Sprinkler linkage, unless you have protected the system against freezing
  • Building glass breakage
  • Water damage
  • Theft
  • Attempted theft.

Regarding covered causes of loss not excluded in the vacancy provisions, ISO forms state that the insurance carrier “will reduce the amount we would otherwise pay for the loss or damage by 15%.”

Form Variations and Reinstatement of Coverage 

Non-ISO forms may read differently, and even ISO forms can vary from edition to edition, so it is incumbent on agents and adjusters that they read the vacancy clause in the applicable form to determine what is excluded.

To reinstate coverage, you can add a Vacancy Permit endorsement, which typically requires an additional premium. The endorsement essentially suspends the exclusions listed under “Vacancy Provisions” and negates the 15% reduction in claim payment. Again, however, reading the form is imperative, as two perils, vandalism and sprinkler leakage, may be excluded from the Vacancy Permit endorsement.

What You Can Do 

Here are five tips for managing risk and filing claims associated with vacant commercial property:

  1. Work with a knowledgeable, experienced agent or broker who knows your business and is willing to read your Commercial Property policy.
  2. Inform your agent or broker of any changes to the building’s occupancy percentage.
  3. Keep up with your maintenance schedule for upkeep of fire protection equipment, external and internal lighting, roofing, HVAC, refrigeration (if applicable), garbage disposal, sprinkler systems and fire/smoke alarms.
  4. Ensure that your burglar alarm and security monitoring systems remain operational.
  5. When filing a claim, be prepared to provide your adjuster with:
  • Copies of any leases
  • Copies of utility agreements and bills
  • Access to police or fire reports.

Bonus tip: Gain a better understanding of your commercial property’s insurance rating. Alera Group’s brief guide to commercial property ratings provides insights on contributing factors such as construction, occupancy, protection and exposure.

GET THE RATING GUIDE.


About the Author

Sharon Compton, CPCU 
Risk Management Consultant
Armstrong/Robitaille/Riegle Business and Insurance Solutions, an Alera Group Company

A Property and Casualty Insurance broker since 1982 and Chartered Property Casualty Underwriter since 1989, Sharon Compton is unsurpassed in the knowledge and experience she brings to commercial insurance clients throughout Southern California. Prior to joining the Irvine, CA, firm of Armstrong/Robitaille/Riegle, an Alera Group Company, she spent 14 years as a Corporate Risk Manager for CBRE, the largest global real estate services company in the world. Her background also includes serving as an instructor in a monthly training program for national property and project managers.

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