One very visible result of the economic downturn is an increase in commercial vacancies across virtually all categories — and that could be leaving owners far more exposed than they realize.

From an insurance perspective, vacancy is considerable concern. Vacant buildings are more susceptible to certain types of damage, and or this reason, most commercial property insurance policies include a vacancy condition that significantly limits or, in some cases, eliminates coverage if the building is damaged.

For example, most policies eliminate coverage if the property loss to the vacant building is caused by vandalism, sprinkler leakage, building glass breakage, water damage, theft or attempted theft. If something else causes damage to the vacant building, such as fire or windstorm, most policies automatically reduce the loss payment by 15 percent. This reduction is in addition to the policy deductible; further increasing the owner’s out-of-pocket expense.

When Is A Commercial Building Considered "Vacant"?

A major concern with the vacancy condition in most commercial property policies is made worse by the fact that a majority of building owners do not understand how the policy defines vacancy. In most policies, building owners are at risk of the vacancy condition and its potentially devastating limitations if less than 31 percent of the building’s square footage is rented or used to conduct customary operations and/or used by the building owner to conduct customary operations. (Note that buildings under construction are not considered vacant.)

For example, consider a four-story office building. Each floor is a separate suite and each has identical square footage. ABC Company occupies the bottom floor. Due to declining economic conditions, three of the building’s four tenants move out, leaving ABC as the building’s sole tenant. Even though ABC is still there, they only occupy 25 percent of the building. Most commercial property policies now consider this building vacant due to the fact that total occupancy has fallen below 31 percent.

The vacancy condition in the policy is not effective immediately. Rather, the building owner typically has an allotment of time, usually 60 days, for occupancy to increase to greater than 31 percent. If after 60 days tenancy is still below 31 percent the vacancy condition is applied to subsequent losses and will be so until tenancy increases.

There are solutions

At Bibby Brilling, we want our clients to understand their coverage. Contact us to discuss your insurance options on all your commercial properties.

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