Vacant buildings, partial vacant buildings and vacant land can be difficult to place since many standard markets do not have a comfort level with the exposure. Even though most brokers don’t specialize in this class, they do see the exposure when, for example, one of their insured’s home becomes vacant, a commercial risk is completing renovation work before opening their business or a business has closed. Continuing to insure these risks means holding onto the revenue generated by these accounts and onto the relationship with the insured. Depending on market conditions, a carrier which insures the vacant risk as part of a large schedule may be persuaded to stay on the risk. If not, the insuring agent must turn to a carrier which provides this specialty coverage.
The opportunity is large for this segment. According to the latest U.S. Census statistics, there are 13 million year-round vacant homes in the United States. This figure is in addition to vacant commercial properties.
Failure to address a change from occupied to vacant could result in a claim denial and leave the agent at risk for an errors and omissions (E&O) claim.
Vacant Coverage
The Building and Personal Property coverage form (CP 00 10) removes coverage for vandalism, sprinkler leakage (unless protected against freezing), glass breakage for the building, theft or attempted theft if the building has been considered vacant for more than 60 consecutive days before the loss or damage. Vacant carriers give back that coverage using the Vacancy Permit (CP 04 50) apart from causes of loss marked with an X as excepted causes of loss.
Many insureds propose insuring their vacant property for their purchase price or its market value. Part of the agent’s responsibility is educating the property owner that the insurance company will likely value a building based on functional building valuation, actual cash value or replacement cost coverage. Failure to insure the risk properly can result in large coinsurance penalties in the event of a loss. Valuation programs run based on the former occupancy can aid in insuring the property to value. This is crucial because agreed value is often difficult to secure for this class.
Many agents are often focused on obtaining coverage for the structure. However, the insured may still want contents coverage. Common examples of this are furniture left in a house when the former occupant moves to a nursing home and the residence is for sale or equipment from a business which has recently closed. If switching from a personal lines form to a commercial form, it is important to note that there isn’t automatic coverage for personal property or other structures at a percentage of the building value.
Business income coverage is a consideration which is often forgotten, as well. The exposure can still exist even if a location is vacant. If there is a signed lease in place and a fire causes a location to no longer be available for a tenant to occupy, the property owner incurs a loss to their income.
What to Know
It is important to partner with a carrier who has a quick quote turnaround. This is necessary when a property investor needs to show proof of insurance for a settlement. Mortgagees also will likely need to be named as an additional insured. Supplying the carrier with appraisals, current photos and the real estate listing for the property provides valuable underwriting information to help get that quick quote when there is no time to pre-inspect a risk.
Carriers offer quoting for vacants online or over the phone which can be especially helpful for a risk with a short fuse. Communicating directly with the underwriter will help to walk the agent through coverage, if they are unfamiliar with this class. It is also important to know the history of the property. Many carriers have a restriction on how long a property has been vacant (often this is two to three years). In addition, there are even more limited markets for buildings with existing damage or those slated for demolition.
Flipping Properties
Due to economic conditions, entrepreneurs have started businesses “flipping” homes. Carriers who insure vacant risks can schedule locations and process endorsements as the “flipper” buys and sells properties plus provide coverage to respond to claims related to the renovations.
Risks undergoing construction warrant special consideration. Coverage for renovations is important because the insured can be held responsible for liability losses excess of the contractor’s policy or may be completing the renovation work themselves. The carrier needs to be aware of any renovations occurring during the policy term so that the appropriate charge for the renovation coverage can be made and any construction-related exclusions removed. An understanding of the project is critical. Some carriers will only provide coverage for certain types of projects such as those which do not involve changes to load bearing building components.
Property investor groups are becoming more popular and provide an excellent opportunity to network with individuals who need coverage for vacants and provide insight into the concerns of these insureds. Speaking at these meetings is a way of establishing expertise in this class of business and gaining new business leads. Due to economic conditions, homeowners are still losing their homes through a foreclosure or short-sale and, even if they are no longer living at the property, may be required to insure the property until they are no longer the official owner. Investors may also be purchasing these properties.
Other Exposures
Some other exposures to consider are spaces which are vacant and undergoing renovations by a tenant. The business is not operating yet; however the landlord requires a certificate of insurance and to be named as additional insured.
These risks may need a policy which responds to losses related to the renovations and provide property coverage for the tenant’s improvements and betterments. Restaurants are a class of business that often has this exposure. Buildouts can be long and expensive as consumers seek unique dining experiences in that competitive industry.
Vacant condominiums, either residential or commercial, are another type of vacant risk. Improvements, contents and business income coverages may all apply to these risks. In addition, associations can still make an assessment against the owner of a vacant condominium just as though it were occupied for property or general liability.
Partial vacants are another type of risk with standard markets struggle. A common scenario for this exposure is vacant square footage on the ground floor of a building due to the closure of a business but there are still occupied apartments on the second floor. This exposure also occurs when, for example, an anchor store closes in a shopping center but surrounding smaller stores remain open for business. CP 0010 states that a building is vacant when 70 percent or more of its square footage is not either rented or used to conduct customary operations so this change from occupied does need to be addressed.
Vacant Land
Vacant land is another exposure with the mortgagee also needing to be named as additional insured. In some areas, the property owner of a vacant lot is responsible for the sidewalk in front of the lot and as a result is at risk for slip and fall losses. This can be a large exposure especially in areas with icy conditions where injuries can be severe and attorneys readily available to take on new clients.
It is important to verify that the land is actually vacant. In urban areas such as New York City, vacant lots are often used for parking so the carrier will likely want to rate the piece of land as a parking lot instead of a vacant lot. In more remote areas, parcels of land with a small maintenance shed or lakes present an additional exposure.
Having one carrier, with a broad appetite, who is able to handle a change in exposure, is a bonus. For example, a carrier who not only writes vacants but also restaurants including liquor coverage can often endorse a risk which has just finished a build out to an occupied restaurant. This frees up the agent’s time by minimizing remarketing of risks. If the policy does need to be cancelled, it is important to pay attention to the minimum earned premium when writing the risk. The premium for some carriers who write vacants is fully earned. Look for a carrier without a minimum earned premium or obtain a short-term policy with prorata cancellation to help mitigate this extra cost.
Vacants may not be an everyday exposure an agent sees but they represent an opportunity to continue to provide an insurance solution for your clients.
Holland is the product leader for USLI's Vacant Building, Vacant Land and Partial Vacant products. She also works with customers in the Mid-Atlantic region. Email: kholland@usli.com. Phone: 888-523-5545.
Comments
One year, I wrote $1.4 million in premium with $29,000 in loss and LAE. Overall, my results were fantastic.
I tried to get one major standard carrier to write a $20 million, multi-story, fire resistive, fully sprinklered office building with 24 hr. security and they declined: "We don't write vacant property."
An underwriter friend once boasted he wrote an unprotected explosive manufacturer for $3. I told him if the building had all of its inherent hazards removed (vacant), he could get $6. He "didn't write vacant property."
Eventually, the E&S market caught on, and started undercutting my rates. Today, everybody wants vacant property (excluding the standard markets, of course).
There is no longer any thoughtful underwriting being done. It's nothing but pricing to get the business. I'm happy I'm retired and no longer working with mental midgets.
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