We’ve recently heard of several cases where a building owner suddenly found their insurance policy was null and void – all because they hadn’t looked closely at an important clause that states a vacant building is no longer covered under their policy.
It’s an avoidable problem, and we’d like to make sure all of you building owners out there are always covered, so let’s talk about this frequently-overlooked clause in your insurance policy.
First things first: policies vary, so make sure you look at yours and read exactly what the terms are to advise your own actions. We’re going to be talking about what’s ‘common’ in these policies and what you need to look out for – but you should read your own policy to see where you currently stand.
Most policies state that your building is considered ‘vacant’ if 33% or less of the building is unoccupied.
If you have a building with 6 units, for example, and only 2 of them are currently occupied, then your building is considered ‘vacant’ for insurance purposes, and many of your coverages may be denied.
What Coverages Are Denied When a Building is Vacant?
Again, this will vary by policy, but what’s important to understand is that your insurer is concerned about covering a building that is at high risk for certain problems. Vacant buildings are more likely to be vandalized, are more susceptible to theft and other criminal activity, and are at a greater risk for fire and water damage.
In short, your insurance company doesn’t want to be held responsible for the damages to your building that arise from the owner’s neglect. Which makes sense, right?
Most property owners would agree it’s completely reasonable for an insurance company to deny a claim when the building has been abandoned and left to the elements. Where a lot of policy owners get into trouble is that the term ‘vacant’ is a little more open to interpretation than the building owner might think.
How Does the Vacancy Limitation Create Problems For Owners?
Let’s say you have a 10-unit building and, due to a massive series of layoffs in your area, you currently only have 3 tenants in your building, with no immediate prospect of new tenants. Since you don’t know about the vacancy clause, you’re concerned about getting those units rented out, but you’re not worried about your insurance coverage.
One night, the front lobby of your building is broken into and vandalized – the mailboxes torn apart, spray painted graffiti everywhere, and lights broken. You notify your insurance company about the break-in and expect your coverage will cover the damage. While you’re on the phone with your insurance company, you mention casually that you only have a few tenants in the building.
“The neighborhood’s gotten a little rougher lately with all the layoffs. I haven’t even been able to find new tenants for 7 of my units.”
And poof – your insurance coverage is no longer valid. Your building is considered ‘vacant’, and the damage from the vandals is no longer covered.
How Can You Avoid Problems with Your Coverage?
You might be tempted to simply not mention your vacancies to your insurance company, but this is actually the worst thing you could do. Your insurance company is going to make an inspection of the property to validate your claim, and they will find out about your vacancies.
Instead, try this: get your insurance company on your side and keep them in the loop.
At Gonzalez, for example, we know that in a difficult economy, many property owners may find their buildings technically classified as ‘vacant’ even if the owner is doing a perfectly good job of upkeep and maintenance. If one of our clients calls us and lets us know that they’re worried about the vacancy clause, we can often come up with a solution that will let them keep their coverage in case of theft, vandalism, and other problems.
If we don’t know about the problem, we can’t fix it. It’s as simple as that. Don’t wait until you need your coverage to kick in – by then, unfortunately it will be too late. Check your policy right now (or ask your agent to check it for you) and find out whether you have a vacancy clause and under what conditions it will kick in.
Then, in the future, if you find you’ve tripped that clause and you’re worried that if something happens you won’t be covered, let your insurance company know about your concerns and let us come up with a solution that will keep you covered while you work on finding new tenants.