t Woodall Batchelor PLLC, we work with many commercial property owners whose renter’s insurance policies have a provision that excludes all coverage if a building is vacant for a certain amount of time. Unfortunately, many of those same policies fail to define “vacant” or ‘vacancy.” So what does that lead to? If you guessed litigation, you’re absolutely right. Let’s review some of the key terms in vacancy and occupancy clauses in property insurance.
The vacancy and occupancy provision in insurance policies often is not recognized by insureds until a loss occurs and is denied by the insurer. The provision, which is commonly found in commercial property and homeowners policies, has been the source of frequent litigation. Although dictionary definitions of the terms vacant and unoccupied vary slightly, “vacant” typically means empty, having nothing in it, devoid of contents. “Unoccupied” ordinarily means without occupants, but with furniture and personal effects being present. The term implies a temporary absence of the occupant(s). Insurers are generally more concerned with vacancy than unoccupancy.
When these terms are included in the policy, but not defined, adjusters need to refer to common dictionary meanings of the terms. Even when the term “vacant” is defined in the policy, it is not always clear from the facts of the situation whether the structure is actually vacant at the time of loss.
Following economic downturns, many businesses close and many homeowners suffer foreclosure, which increases the number of unoccupied or vacant structures. Insurers have always been concerned about such buildings or dwellings — particularly vacant structures — because of the increased exposures to loss they represent. A vacant or unoccupied structure increases the loss potential from a number of perils because typically no one is tending to the building or dwelling. For this reason, a vacant structure poses higher risks of loss from perils such as fire, vandalism, theft and other criminal activity, water damage from leaking or burst pipes, mold, and weather-related damages. In vacant or unoccupied buildings, damage caused by these perils can go undetected for some time, thus increasing the severity of the loss.
The vacancy provision in standard commercial property policies demonstrates the significance of the vacancy limitation. The limitation, which appears under Loss Conditions in the policy form, contains two parts, which define “building” and describe what constitutes vacancy. When the policy is issued to a tenant, building means the unit or suite rented or leased to the tenant. The building is vacant when it does not contain enough business personal property to conduct customary operations.
When the policy is issued to an owner or general lessee, building means the entire building. The building is considered vacant unless at least 31 percent of its total square footage is rented to a lessee or sub-lessee and used by the lessee or sub-lessee to conduct its customary operations; and/or used by the building owner to conduct customary operations. Buildings under construction or renovation are NOT considered vacant. Prior to 1995, only buildings under construction were exempt from the vacancy provision. An exemption for buildings under renovation was added at that time. The policy goes on to say that if the building has been vacant for more than 60 consecutive days before loss or damage occurs, the insurer will not pay for a loss by perils such as vandalism, sprinkler leakage (unless the insured has protected the system against freezing), building glass breakage, water damage, and theft or attempted theft.
If you’re interested in finding out more information about renter’s insurance or property insurance policies, terms, or anything regarding legal consequences for commercial real estate, feel free to reach out to our team at Woodall Batchelor PLLC to learn more.