September 2, 2016 by Glenn Minnis, Manager, Property, Markel
Though a vacant structure is typically viewed as a materially different risk than an occupied structure, the term “vacant” is not specifically defined in the various provincial Insurance Acts.
An insurer is entitled to identify how the premises are being used. If a vacant building represents a materially different risk, as it increases the likelihood of loss, defining the term is imperative for applicants.
That said, pinning an exact definition on the word “vacant” can be elusive at times.
Simply put, there are multiple factors that might indicate whether a structure is rightly termed occupied, unoccupied or vacant. For instance, the difference between the terms “vacant” and “unoccupied” is often related to the occupant’s intention to return, notes the Insurance Institute of Canada publication, C12 Insurance on Property.
Therefore, to define a risk as vacant, both its unoccupied status and the intention of the property to permanently remain as such must be considered.
In the end, each situation is unique and all circumstances must factor into defining a building’s occupancy status. A few questions that might assist in this endeavour are as follows:
Ultimately, the courts will decide an appropriate definition based on the specific nuances of each case. However, the aforementioned should serve as a reliable starting point.
Unless specifically endorsed, a typical broad form commercial property policy will exclude loss or damage to property at locations which, to the knowledge of the insured, are vacant, unoccupied or shut down. The exclusion normally allows for a period of time, usually up to 30 consecutive days, where the premises can be in a vacant or unoccupied state without affecting coverage.
Indeed, some provincial regulations – such as British Columbia’s Insurance Regulation – preclude an insurer from attaching an exclusion for fire prior to this 30-day threshold.
As a result of the increased likelihood of loss arising from a vacant building, insurance carriers are often limited with regard to the amount of capacity that can be placed on a risk that is considered vacant. Moreover, the terms and conditions that underwriters are required to impose are usually more restrictive. Coverage is often placed on a named-perils basis with higher rating, larger deductibles and a specific endorsement allowing the premises to be considered vacant and covered by the policy.
Insurers typically elect for a named-perils policy, as opposed to a broad form wording, as this removes coverage for key concerns such as water-related losses and theft with resulting damage.
In addition, vandalism is typically excluded by endorsement, as is illegal drug cultivation.
The building valuation is often restricted and amended to an actual cash-value basis and some insurers elect not to cover equipment.
As described by the International Risk Management Institute, the vacancy permit endorsement – worded as a warranty by some carriers – “suspends some or all of the coverage restrictions that apply to buildings that have been vacant for more than a specified time period.”
These conditions, commonly found in a vacancy permit endorsement, are designed to ensure the property is still adequately maintained in order to reduce the chance of loss.
For example, a vacancy permit might require the insured to securely lock all windows and doors, remove all rubbish,
maintain heating and electrical utilities, and consistently visit the property within a specified time period (anywhere from every 48 hours to every seven days).
Some insurers will limit the policy period to three or six months, with many not agreeing to extend these policies for risks that have been vacant for two or more years.
Depending on the situation, it is not uncommon for carriers to bend their internal rules. There is also no shortage of companies, including managing general agents, willing and able to provide some form of coverage.
However, the longer a property sits idle, the more difficult obtaining coverage is likely to be. This is an especially pressing concern where an insured may have a mortgage on the property, since the mortgagee will likely require proof of insurance to maintain the financing.
Moreover, as the length of the vacancy is extended, carriers often become more concerned with the moral hazards presented, a concern that is justifiably heightened with the “innocent co-insured” provisions in provincial regulations.
These provisions allow recovery by an innocent insured on the policy even where another insured on the same policy is found to have acted criminally, for example, by committing arson.
The main concern for carriers when it comes to insuring vacant risks is the severity exposure stemming from fire-related losses.
In the United States, the National Fire Protection Association (NFPA) reports that 43% of vacant building fires were intentionally set. Moreover, in unsecured properties, 57% of the fires were intentional compared to 31% in secured properties, notes the 2009 article by NFPA, Vacant Building Fires.
Fire protection systems, even when they are still connected and active, are often ineffective where a fire is caused by the rehabilitation to the outside of the building since most automatic systems are designed to suppress fires originating within the structure.
A fire can certainly result in a total building loss. Fires are often caused by unannounced renovations to the structure, homeless persons seeking shelter, vandalism or arson.
The same concern arises where vandalism, discarded cigarettes and dumpster fires could ignite the outside of the structure.
The more common and less expensive losses typically stem from petty vandalism, break-ins and water damage.
A higher frequency of losses arises from water damage. Water damage can easily exceed $100,000 and so mitigating water-related losses requires specific attention by the insured.
This peril is not covered under named-perils policies; however, water damage that results from leakage of the fire protection equipment can be covered, depending on the specific policy.
This has led to significant losses where suppression systems or tanks have frozen and leaked over a period of time, resulting in extensive water damage. For this reason, some underwriters insist on a building’s heat remaining at an appropriate level during winter vacancy.
To reduce the likelihood of loss, stakeholders should consider the following practical measures:
Beyond the potential for damage to the insured’s property, there are many other liability concerns that property owners need to consider. Among these, a duty of care is owed to visitors and trespassers, especially youth, who may be drawn to the premises.
As well, a fire or water loss has the potential to migrate onto a third party’s property. Depending on the circumstances, the latter can be considered as a result of negligence.
Glenn Minnis, Manager, Property, Markel