As a result of the pandemic, you may end up with a building that your insurance carrier considers “vacant” even if it is not empty. “Vacant” and “Unoccupied” have different meanings and implications in the insurance world as discussed in this article.
With offices shut for months and estimates that one-third of workers will work from home after the pandemic ends, it is imperative that owners of commercial property understand so-called vacancy conditions in their Property policies. This provision automatically reduces coverage if the building is not occupied up to a certain threshold and/or contain personnel to conduct it customary operations. Insurance companies have different criteria/thresholds, so it is important to review how this clause reads in the policy. The bottom line is that even if you have tenants, if there are not enough of them in the building on a regular basis, your building can be considered vacant.
Once the vacancy condition is triggered, usually after the vacancy exceeds 60 days, it typically excludes coverage for perils like vandalism, water damage/broken pipes, sprinkler leakage and theft. Most policies will also reduce the amount the insurance company will pay for a covered loss, like a fire, by 15%. And if the fire is caused by vandals, it is likely the insurance carrier will claim it is not covered at all.
The insurance implications of decreased occupancy of properties is not a new problem, but it has been exacerbated by the response to the pandemic. There are ways to deal with the situation depending on which stage you are in within the life cycle of the current insurance policy. Insurance companies may be willing to insure unoccupied buildings (meaning that there is furniture and is ready for personnel to work in the space) versus vacant buildings. There is a notable difference in the insurance world between the two classifications. Although unoccupied buildings are more desirable to insurers than vacant ones, the insurance is expensive. Furthermore, coverage may not be as broad, and if the building is financed, it may be harder to comply with loan insurance requirements. It is best to be pro-active if there is an on-going concern about future occupancy rates and be able to budget for the increased premiums.