With the current economic downturn, many property owners have experienced vacancies in their commercial building portfolios. Beware of the Vacancy Clause!
The standard clause in general use is worded such that if your building is more than 70% vacant for more than 60 consecutive days, you lose valuable coverage as follows,
(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.
Additionally, with respect to losses that are still covered (fire), the carrier will reduce the amount otherwise payable for the loss or damage by 15%!
With copper piping a high value target for thieves, a theft from a vacant building can easily climb to $100,000. This wouldn’t be covered if the Vacancy Clause were in effect.
Furthermore for a building whose replacement value may by $10M, a 15% reduction in recovery for a fire would be $1.5M–a serious penalty for an “insured” loss.
Some standard carriers don’t have the vacancy clause in their basic form. This is not to say these carriers ignore the issue, only that it’s not an automatic coverage restriction. Vacancy is normally dealt with as an underwriting issue at policy renewal.
When your carrier has the Vacancy Clause in their policy form, you must have a discussion with your underwriter immediately. Most carriers have ways of dealing with the issue by endorsement, waiving the restrictive clause when the building meets underwriting criteria.
If your underwriter won’t remove the clause, you must consider other alternatives. There are insurance companies that will underwrite and offer terms on vacant buildings, though frequently at increased deductibles and much higher premiums.
Finally, your loss control vigilance may need to be increased during a vacancy period. In addition to maintaining the alarm systems, you may need to consider private patrols at nights and on weekends, as well as other loss control measures.
The attached advisory article published by Chubb Insurance is a helpful loss control guide.
It’s bad enough to experience a loss of rental income and cash flow; you don’t need the compounded problems of uninsured losses or reduced loss recovery.
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