April 9, 2020 by Jason Contant
Canadian brokers want a uniform response from insurers on how to deal with commercial policies that have a 30-day vacancy or unoccupied clause.
Most commercial property policies have such an exclusion, meaning that losses or damage to property is excluded if the property is either vacant or (in some instances) unoccupied for more than 30 consecutive days. As social distancing to prevent the spread of COVID-19 continues, many businesses that have shut down or closed voluntarily are now approaching that 30-day threshold.
“What we’d like to see, if at all possible, and I know it’s challenging, is some uniformity around how we deal with a couple of issues — and the vacant or unoccupied premises is one of them,” Kent Rowe, president of the Insurance Brokers Association of Canada (IBAC), told Canadian Underwriter Thursday. The topic of the discussion was emerging commercial issues facing brokers during the pandemic.
“What we’d like to see happen…is for insurers to waive, if possible, the 30-day unoccupied premises clause for the duration of the state of emergency, and for any continued designation of essential and non-essential services, because that’s what’s leading to some closures as well,” Rowe said. “A lot of businesses are being forced to close temporarily for reasons beyond their control.”
Insurance Bureau of Canada (IBC) said it does not have an industry-wide perspective of the issue at this time, but “the issue of vacancy has come up and the industry is aware of some of the challenges and working with policyholders on how to be helpful.”
Rowe noted that insurers “have done a really good job of [looking into] this and they are looking at things on a case-by-case basis and have been extremely cooperative up to this stage.”
One insurer, RSA Canada, said last month they understand the circumstances businesses are in. But the insurer also expects its business clients to do everything they can to secure and maintain the sites appropriately (through adequate sprinkler protection, cleaning up garbage, proper lighting and locks, etc.) Rowe agreed it’s important to implement appropriate risk management and mitigation strategies to minimize exposure, but still be fair to business owners given the current environment.
“I would hate for someone’s fire damage claim to be denied because of these types of exclusions,” said Karen MacWilliam, a Nova Scotia-based consultant specializing in insurance and risk management.
MacWilliam said in an interview Wednesday she is not hearing a lot of insurers take a position with respect to property that is vacant or unoccupied for more than 30 consecutive days. “It would be ideal if insurers offered clarification about whether current circumstances meant that they considered the property to be vacant or unoccupied.”
That said, MacWilliam said she wouldn’t fault an adjuster for applying an exclusion for vacancy or unoccupancy. “An adjuster can only interpret the policy that was written.
“I think insurers really do need to get out in front of this and make a statement in advance – whether it’s increased vigilance on the part of property owners, or giving some sort of direction to their brokers so that brokers can advise clients accordingly,” she said.” I would hate for someone already going through a horrible time to have a legitimate loss and have the insurer apply the exclusion because the client was unaware.”
MacWilliam does training for brokers to minimize their errors and omissions liability exposure. As far as her advice to brokers goes, she said: “Brokers need to discuss it with their clients and, where appropriate, insurers should be advised formally of any properties that are vacant or unoccupied.”
She noted that some clients may be concerned about advising of vacant or unoccupied properties, particularly in this insurance marketplace, because that may lead to increased premiums. “But I think it’s always better to tell the insurer and put the ball back in the insurer’s court and say, ‘What, if anything, additional is required.’”
On the plus side, if a client has halted their operations, such as food service operations, for example, they may want to ask about premium reductions. That’s because their exposure to things like product liability and slip-and-fall incidents would be next to nothing.
Another point to note is that these exclusions typically depend on whether there’s an expectation that the insured would ultimately return, MacWilliam said, which can be difficult given the current environment.
Right now, they may have every intention to return to the property. But what if the business fails?
“If their landlord requires them to have insurance, or if they own the building and their mortgagee requires them to have insurance, I can see really getting into a bun fight with the insurer about the definition of vacancy and unoccupancy,” says MacWilliam, “because a lot of the definition hinges on whether there is an intention to return.”
Insurers may take the position that “irrespective of the presence of furnishings, if the policyholder has no intention of returning, then it’s vacant,” says MacWilliam. “But that may be something the occupant really doesn’t know.”