Condolidations, Downsizing Trigger Need for Vacant Building Coverage

When asked about current economic conditions, especially related to downsizing, many CEOs cite human resources concerns. How will terminated employees handle the situation? How might increased workloads for remaining employees affect the operation as a whole? How will productivity change?

While these are valid concerns, a common unrealized exposure from downsizing arises in the area of asset protection. When a company consolidates to fewer locations, it might not have as much protection as it thinks on vacant buildings. Insurance settlements for claims occurring at unoccupied locations could be drastically lower than claim payments for claims in occupied buildings.

ISO has defined a vacant building as one which “has been left vacant or unoccupied for a period of 60 consecutive days.” Once the 60-days standard is met, a policy’s vacancy clause is triggered. This clause removes coverage occurring from the following perils:

• Vandalism
• Building glass breakage
• Water damage
• Theft or attempted theft
• Sprinkler leakage

In addition to the removal of those perils, any other covered cause of loss (fire, wind, collapse, etc.) will be penalized by 15 percent. For example, a total loss due to fire on a building valued at $200,000 would be paid at $170,000.

Since an insurer typically only discovers a vacancy after a loss has occurred, there is no notice that coverage is restricted. In addition, since the vacancy clause is part of the original policy form, there is no premium reduction associated with the restriction in coverage.

Following are responses to questions insureds frequently ask about vacant buildings:

We have reduced staff and operations at one of our locations, but some people are still there. What constitutes vacancy?
In the current edition of the Commercial Property form (CP 00 10) and Business Owners Policy (BP 00 03), a building is considered vacant or unoccupied if less than 31 percent of the total building square footage is leased to a third party lessee or being used for normal operations for 60 or more consecutive days.

Our company has a facility that will be vacant for the foreseeable future. What can we do to avoid reduction in coverage?
Vacant buildings require special underwriting. Notify your insurance broker or agent of the change in operation. Ask him or her to provide a proposal for vacant building coverage during the vacancy period.

Is coverage for my vacant building going to increase my premiums?
Yes, the premium will be higher than a standard premium because the exposures for vandalism, theft, frozen pipes, etc., are far greater for vacant buildings. However, while the cost is more up-front, a vacant building policy provides full coverage. With a standard policy, the premium remains the same as it would if the building were occupied, but removes coverage for the five perils cited above.

During any economic climate, it is important for companies to keep an eye on human resources, property, liability and net income. There can be penalties for focusing too much in one area. Paying attention to vacant building exposures will minimize an insured’s risk of financial loss from a reduced settlement.