Posted: 06.17.2010
For Lease Property Vacancy

For Lease

This difficult economy has claimed many casualties, including an increasing vacancy rate in commercial buildings. So it's especially important today that building owners and tenants are aware of how these conditions affect their commercial property insurance coverage.

Vacancy Defined

Insurance Services Offices (ISO) is the leading source of property and liability risk information and provides statistical, actuarial and underwriting information to insurance companies, government regulators and other interested parties. Most insurance companies use ISO's language in their policies.

ISO has defined vacancy for tenants and buildings owners:

• Tenant - If a tenant's suite or unit does not contain enough business personal property to conduct customary operations, the suite or unit is considered vacant.
  
• Building - Less than 31% of the building's total square footage is rented out to others who use it to conduct customary operations or used by the owner to conduct customary operations. (Buildings under construction or renovation are not considered vacant.)

If a building is vacant for 60 or more consecutive days before the loss:

• If loss is caused by theft, attempted theft, vandalism, water damage, sprinkler leakage or building glass breakage - the policy pays nothing, no coverage.
  
• If the loss is caused by any other covered cause of loss - the company will subtract 15% from the amount they otherwise would have paid.

Vacancy Example

For example, suppose ABC Co. owns a commercial strip center. The anchor tenant moved out 3 months ago, due to the economic conditions. With the loss of the large anchor tenant, the strip center is now 20% occupied based on the building's total square footage. Over the weekend, some people vandalized the building, kicking in walls, spray painting the floors, ripping materials down, etc. In this instance, there is no coverage because the building is vacant by definition. Alternatively, using the same details and assumption from the previous example, let's suppose there is a fire from a lightning strike to the building. With a fire, there is coverage but the final payout would be reduced by 15%.

Vacancy Endorsement

Some insurance companies will allow you to continue to maintain full coverage if they are notified within the 60 day window required in the ISO policy. The insurance companies will add the "Vacancy Permit Endorsement", for an additional premium, to allow you to maintain full coverage. Other insurance companies do not want the exposure of a "vacant building" (as defined in the policy) at all.

Work with your Brown & Brown Advisor

Since not all insurance companies use ISO language and some companies use even stricter language or define terms differently, it's imperative to discuss your policy with your Brown & Brown advisor. By doing so you are protected against losing coverage unknowingly.

Brian Pilarski
Brown & Brown of Detroit
586.977.6300
bpilarski@bbdetroit.com

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