Guest Post by Chip Stuart

With the recent end of the public health emergency and shelter-in-place orders stemming from the COVID pandemic lifted, people can now go back to the office, yet many spaces in the commercial real estate market remain vacant. The current state of the economy, which has forced many companies to downsize, has also factored into the increase in vacant properties.

At the end of Q1, average office vacancy rates across the United States were at 18.6%, but it’s worse in some large metropolitan areas. In Chicago, almost 23% are vacant, while in San Francisco, the vacancy rate is hovering around 30%. The retail vacancy rate in San Francisco is even higher, and rose to 6% in the first quarter of this year, the highest on record since 2006. 

So, if a building is unoccupied, how does that affect a building owner’s property insurance coverage? The answer depends on whether the property is considered vacant or just unoccupied.

Vacant properties carry an increased risk of loss over a facility that’s simply unoccupied. Most commercial property policies have coverage restrictions for vacant buildings, often called a “Vacancy Clause.” As a result, an insurer will deny coverage for water damage, theft, and vandalism when a building is vacant for more than 30 or 60 consecutive days, depending on the policy.

Other critical losses stemming from fire, lighting, smoke, and wind or hail for example will also significantly reduce payouts when buildings are deemed “vacant.” In these situations, the insurer will typically pay actual cash value instead of replacement costs for vacant buildings for covered losses.

On the other hand, buildings deemed “unoccupied” are still maintained, since merchandise, furnishings and equipment may still remain inside as owners actively try to lease or rent the facilities. Unoccupied but preserved facilities have a greater chance of their property policies covering a claim. 

Vacant vs. Unoccupied Scenarios

At the core of the issue of vacant vs. unoccupied is the occupant’s intention to return. Are the utilities still connected and in operation? Is the building inhabitable?

Consider a retail space that is boarded up or had windows fixed after a break in or fire, but the space lays empty for years. These properties are considered vacant.

On the other hand, many high-rise office buildings in urban areas right now only have a single tenant on the ground floor, while the rest of the floors are unoccupied. Even if a high-rise building only has one occupant, it should not be considered vacant. Why? A security guard may be in place; the parking garage below the building is still usable, and it’s likely that a facility manager is still on hand to care for the property.

A vacant property that has a claim is likely to see either a loss of coverage or a 50% depreciation in coverage due to the policy’s valuation clause, which triggers depreciation. Here are some scenarios that are likely to deem a property “vacant,” which may compromise property coverage: 

  • Water damage. If heat has been shut off to reduce costs, there’s a greater chance a pipe can burst and do damage. Without anyone there, it could be days or weeks before damage is discovered. A regularly maintained building even without occupants is less likely to experience water damage. 
  • Appearance/Security. Criminals tend to seek out the easiest opportunity to vandalize property. If a retail space is lit up and secured even while unoccupied, and there’s another without security that looks vulnerable, the vacant one will be an easier target for squatters, who may set up camp and damage the facility, or thieves, who may steal precious metals such as copper piping.
  • Fire protection. A facility will likely be deemed vacant if the sprinkler system is disengaged and fire pumps and alarms are not tested or serviced regularly. 

How to Navigate Property Coverage Today 

Whether your property is deemed vacant or unoccupied, consider the following best practices for navigating property coverage: 

Create a plan for your facility. If your facility is unoccupied, remove all perishables and valuables from inside and secure doors and windows. Have employees, security personnel or facilities managers still inspect and maintain your site. Spell out their duties, including testing faucets and the fire and sprinkler system regularly. Make sure they continue to abide by OSHA and other safety rules, including those put out by federal and local health authorities. 

If your facility is vacant, immediately inform your insurance provider to make sure you are properly covered. Speak with your broker. It’s not a requirement to inform the insurer if a building is vacant. But not informing your provider may depreciate the value of the pay out or eliminate coverage altogether if there’s a claim. In addition, there may be policy ramifications to consider if your building is vacant. Unfortunately, an insurer determines if a building is vacant or unoccupied after a loss happens, and there is no duty to inform the insured of this change. If you’re unsure of whether your property is considered “vacant” or “unoccupied,” talk to your insurance broker. 

James “Chip” Stuart is the corporate Chief Sales Officer and Practice Leader for global insurance brokerage Hub International’s real estate specialty in North America.