Protecting Commercial Property Investments through Vacancy Permit Endorsements

Author, Kevin Howard, Partner, Rancho Mesa Insurance Services, Inc.

Commercial real estate owners may face significant exposure nationally due to vacancy clauses and policy exclusions. The vacancy permit endorsement can potentially fill a major coverage gap within commercial property policies for landlords.

COVID-19 forever changed the commercial real estate industry by shutting down operations in several asset classes, including retail, office, and industrial. The shutdown created a huge spike in vacancy rates that has certainly come back to nearly normal levels but still presents issues for many landlords. For example, office buildings have seen a continued increase in the national vacancy rate from 12% in 2017 to 16.5% in Q4 of 2023 (www.statista.com).

For property managers and building owners, the risk of an insurance claim within a vacant space has increased, making a focus on coverage paramount. Most insurance policies have specific exclusions that can limit coverage for bodily injury or property damage based on the duration of a building's vacancy or the percentage of the building that is vacant. For example, some exclusions restrict coverage entirely if the building has been vacant for more than 60 days. Another common exclusion requires that at least 31% of the building be rented, leased, or owner-occupied for coverage to respond.

Vacancy Permit Endorsement

For insureds, requesting a vacancy permit endorsement is a smart move that helps eliminate any guesswork regarding coverage gaps. Most carriers will tailor this endorsement to specify the vacancy period, the coverages in place, and the conditions that need to be met by the insured. These conditions typically include maintenance disclosures, inspection reports, and security measures.

There is usually a relatively small premium adjustment for a vacancy permit endorsement, which is well worth the investment compared to the potential cost of an uninsured claim.

The risk associated with vacant properties is more pronounced than ever. Owners and managers must be proactive in securing appropriate coverage to mitigate these risks. The vacancy permit endorsement is a crucial tool in this effort, providing tailored coverage that addresses the specific challenges posed by vacant spaces. By understanding and utilizing this endorsement, property owners can ensure comprehensive protection, safeguarding their investments against unforeseen claims and maintaining peace of mind in an ever-evolving market.

COVID-19 Business Shutdown: What Coverage Gaps Exist with Vacant Properties

Author, Daniel Frazee, Executive Vice President, Rancho Mesa Insurance Services, Inc.

In response to the COVID-19 pandemic and ensuing shelter in place restrictions, many non-essential businesses have been shuttered for several weeks. As those businesses deal with the massive revenue and employee losses, building owners must be cautioned to review their property policies closely for vacancy provisions and exclusions.

Vacancy clauses can create exceptions from coverage if the property in question is vacated or unoccupied for a defined period of time (most often 60 days but often shorter). For example, there are some policies that will not provide coverage if a property sits vacant more than that fixed number of days but applies to only certain types of losses like vandalism, theft, or water damage. Additional limitations can include a reduction of losses by 15% or more for more typical covered causes of loss like a building fire and certain losses can be excluded altogether once a property is vacated depending on the insurance company’s form. Finally, there are still other policies that will, in fact, provide coverage for any types of losses but stipulate that the policyholder must inform them that the property has been vacated.

What qualifies as vacant or unoccupied? Some policies define these very specifically while others are broad and ambiguous, offering little comfort at the time of loss. Rather than wait until after a loss when coverage might still be in jeopardy, take the initiative now to contact your broker if your property is vacant or partially occupied as a result of the COVID-19 pandemic. Communicating with the insurance company will help clarify definitions and interpretations and allow you to plan appropriately for the potential of a property loss.

While this continues to be an unprecedented time, several insurance companies are now sending notices to policyholders that they will not consider a building to be vacant for the days during any period of occupancy that changed as a result of the government stay-at-home order or similar directive to COVID-19. Take time now to review your policies with your broker, learn more about your specific vacancy provision and whether your insurance carrier will waive some or all of this provision during this window of time.

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