Vacant Buildings: A Side Effect of Downsizing

Companies that have faced reduced settlements from an insurance carrier often ask why they were not notified that coverage would be restricted.

When asked about current economic conditions, especially related to downsizing, many CEOs cite concerns surrounding human resources issues. How will terminated employees handle the situation? How might increased workloads for remaining employees affect the operation as a whole? How will productivity change due to employees covering areas in which they do not specialize?

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

The Insurance Services Office (ISO) has defined a vacant building as one which “has been left vacant or unoccupied for a period of 60 consecutive days.” Once a building has met the 60-day standard, a policy’s vacancy clause is automatically triggered. A vacancy 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.

Companies that have faced reduced settlements from an insurance carrier often ask why they were not notified that coverage would be restricted. Since insurance carriers often only discover a vacancy after a loss has occurred, no notice is required from them. 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 frequently asked questions about vacant buildings:

Q: We have reduced staff and operations at one of our locations, but some people are still there. What constitutes vacancy?
A: 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.

Q: Our company has a facility that will be vacant for the foreseeable future. What can we do to avoid a reduction in coverage?
A: 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.

Q: Is coverage for my vacant building going to increase my premiums?
A: Yes, the policy 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 you are paying more up-front, a vacant building policy provides full coverage. With a standard policy, your premium remains the same as it would if the building were occupied, but removes coverage for the perils listed to the left.

During any economic climate, it is important for companies to keep and eye on four logical categories of risk: human resources, property, liability and net income. While it is sometimes very difficult to prioritize among the four categories, there can be severe penalties for focusing too much in one area and not spending enough time to evaluate the risks of another. Paying attention to vacant building exposures will minimize an insured’s risk of financial loss from a reduced settlement.