Learn how the vacancy clause impacts your investment property insurance coverage.

Read about potential scenarios involving vacant investment property.

Knock, knock. Who’s there? Investment property vacancy.

Building vacancy increases the likelihood of property loss. Vacancy and delay in discovering loss or damage go hand-in-hand. In turn, delayed discovery easily results in further damage and/or deterioration to the property, as no timely mitigation is exercised. It is especially important for investment property owners to realize that a building(s) is considered vacant, even if it is partially occupied with tenants. Building vacancy significantly reduces and sometimes eliminates, insurance coverage.

Enter the Vacancy clause of the standard commercial property policy. From the standpoint of the investment property owner, building means the entire building. There are three key factors to be aware of with respect to vacancy in the standard commercial property policy:  1) square footage occupancy threshold;  2) time frame of vacancy;  3) causes of loss for which coverage is completely eliminated, as well as 15% reduction in loss payment for all other covered causes of loss.

In summary terms*, with respect to items 1), 2), and 3) above:  1) a building is considered vacant unless at least 31% of its total square footage is either leased and used by the tenant to conduct that tenant’s customary operations or used by the building owner to conduct customary operations; 2) if a building has been vacant for more than 60 consecutive days before loss or damage occurs, then 3) no insurance payment will be made for any loss or damage caused by vandalism; sprinkler leakage (unless insured has protected the system against freezing); building glass breakage; water damage; theft; or attempted theft. Additionally, with respect to 3), the amount the insurance company will pay for all other covered causes of loss will be reduced by 15%.

Real-life situations present “iffy” coverage issues. Let’s consider a few scenarios from the standpoint of vacancy and standard property coverage for the insured investment property owner only*:    (NOTE:  Tenants, where applicable, should purchase their own insurance coverage to protect their respective interests.)

Q1: Knock, knock. Who’s there?

A1: Single-family residential property, which has been vacant for 3 months.

Q2: Does property coverage apply due to accidental fire loss?

A2: The biggest problem is investment property is 100% vacant for more than 60 consecutive days before the accidental fire loss. Most likely, the loss payment for an accidental fire would be reduced by 15%, due to the vacancy. However, if the property is under renovation, it is not considered vacant.

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Q3: Knock, knock. Who’s there?

A3: Commercial strip shopping center (building) with 50% vacancy for one year.

Q4: Does property coverage apply to vandalism of either the occupied or unoccupied stores?

A4: Depends on whether or not the 50% occupancy meets the 31% total square footage occupancy threshold. If less than 31% of the strip shopping center’s total square footage is deemed occupied for customary operations, no coverage applies to loss or damage due to vandalism. Realize, this means no coverage would apply to vandalism loss/damage to the occupied stores as well, from the standpoint of the investment property owner’s insurance.

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Q5: Knock, knock. Who’s there?

A5: Three-family residential property with two units vacant; one vacant for 45 days, the other vacant for 90 days. None of the units are under construction or renovation.

Q6: Does the investment property owner have coverage for theft of tools used to maintain the property and kept in one of the vacant units?

A6: This scenario gets into the weeds in terms of the first two key factors involving vacancy: 1) square footage occupancy threshold and 2) time frame of vacancy. Any loss or damage due to theft occurring under this scenario would likely be carefully scrutinized by the insurance company with respect to whether or not and/or how much coverage would apply.

 *Coverage for actual loss or damage is subject to policy terms and conditions. The summarized statements and example scenarios presented in this blog are for ease of explanation and illustrative purposes only.

There are optional coverage endorsements that reduce or rescind the standard vacancy provisions. Investment property owners should be mindful of this and contact their independent insurance agent to discuss their particular situation.

Real-life demands real attention. Richey-Barrett Insurance is your Trusted Choice Independent Insurance Agent for your investment property insurance needs.