Author: Nancy Germond

With many employers now fully convinced at least some “work-from-home" is here to stay, ensuring vacant properties have proper protection can mean the difference between a happy customer and one who faces a reduced post-loss payout, or even an outright claims denial in some instances.

What is the Function of the Vacancy Clause?

Because insurers know there is a correlation between vacant property and vandalism and losses such as water damage and fire, insurers developed a vacancy clause. In vacant properties, maintenance and premises management typically suffer.

When underwriters price property coverages, they rely on “normal" conditions when they quote the risk. This means the rate will reflect a fully occupied building unless you inform the underwriter of anything else. Insurers insert vacancy clauses in policies to “encourage" building owners to properly manage and maintain their locations.

The Vacancy Clause in Commercial Policies Apply to Commercial Real Estate (CRE)

After a loss, the adjuster assigned to the claim usually visits your insured's property to prepare a loss scope and develop a repair estimate. Whether a property is “vacant" or “unoccupied" can cause red flags in that claim person's mind.

If a property is vacant or unoccupied, the adjuster will review the policy form to determine the exact wording that applies to any vacancies.

Wording about vacancies appears in the loss conditions section of the commercial property policy.

Here is the wording from the CP 0010 (10/12) edition of the Insurance Services Office (ISO) commercial property policy.

Description of Terms

(1) As used in this Vacancy Condition, the term building and the term vacant have the meanings set forth in (1)(a) and (1)(b) below:

(a) When this policy is issued to a tenant, and with respect to that tenant's interest in Covered Property, building means the unit or suite rented or leased to the tenant. Such building is vacant when it does not contain enough business personal property to conduct customary operations.

(b) When this policy is issued to the owner or general lessee of a building, building means the entire building. Such building is vacant unless at least 31% of its total square footage is:

(i) Rented to a lessee or sublessee and used by the lessee or sublessee to conduct its customary operations; and/or

(ii) Used by the building owner to conduct customary operations.

(2) Buildings under construction or renovation are not considered vacant.

However, the policy continues by stating the following.

Vacancy Provisions

If the building where loss or damage occurs has been vacant for more than 60 consecutive days before that loss or damage occurs:

(1) We will not pay for any loss or damage caused by any of the following, even if they are Covered Causes of Loss:

 (a) Vandalism;

(b) Sprinkler leakage, unless you have protected the system against freezing;

(c) Building glass breakage;

(d) Water damage;

(e) Theft; or

(f) Attempted theft.

(2) With respect to Covered Causes of Loss other than those listed in b.(1)(a) through b.(1)(f) above, we will reduce the amount we would otherwise pay for the loss or damage by 15%.

Proprietary property forms may have different wording, including wording that defines vacancy as “active use" for the building's “intended purpose." This is just one example of how wording may differ in proprietary commercial property forms.

How the Vacancy Clause May Impact the Investigation

If the property adjuster believes the vacancy clause may apply, he or she will want more information from your insured.  If this happens and your insured contacts you, always recommend they cooperate fully with the adjuster and avoid becoming defensive.

The adjuster may request the following information from your insured.

• Lease copies
• Utility bills and agreements with utility providers
• Police or fire reports, which the adjuster will usually order directly from those agencies

The adjuster may contact any tenants in the building to learn more about occupancy histories. These are all normal parts of an investigation where occupancy may be an issue.

Vacancy Clauses in Brief

Reminding your insureds about vacancy clauses, not only in CRE but in personal lines property policies, is a good idea. If your insureds lose occupancy or change operations at the building, you'll want to know. Vacancy permit endorsements can protect your clients if their occupancy status changes, but only if you know their situation. With extended periods of vacancy, a switch to a more appropriate commercial form can solve the problem. Carriers that specialize in CRE may offer the coverage your insured would require for a vacant commercial building.

Each state has litigated vacancy issues, and case law varies greatly by jurisdiction. There is little doubt that crimes against property have become a significant issue in recent years, and when the economy suffers, property crimes may escalate.

The vacancy clause can impact even successfully managed properties because many CRE managers are unaware of its implications.

We know that the CRE market is under extreme pressure. Work from home, mall closures and high interest rates have backed many CRE owners into a corner. With all the uncertainties of the current commercial building market, now is a great time to remind your clients about the importance of the vacancy clause. 

Remember, too, that when your personal lines clients enter assisted living or pass on, occupany in their homes may change either temporarily or by estate transfer, for example, to a grandchild. My parents who were local agent in the west valley of Arizona for many years, subscribed to a few papers to read obituaries, watching for client deaths. Today, you can do that online, of course. 

First Published: May 13, 2022

Updated: September 10, 2023

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