As if losing a major tenant at an investment property weren’t bad enough, investors need to be aware that when a building becomes vacant there could be added risks written into the property’s insurance policies. Vandalism, “malicious mischief” and other damages are just some of the exclusions of certain insurance policies.
By Tez Warmey | July 13th, 2021
If the past year has taught us anything, it’s that in the blink of an eye, lessors can unexpectedly lose even a top producing retail tenant. When a business declares bankruptcy, the business is removed from the property and the building may sit vacant for a long time. While business owners have to deal with huge losses in their revenue, property owners face a loss in their own revenue plus the stress that can arise from insurance coverage exclusions for their vacant buildings.
With all insurance companies, there are policy exclusions which are carefully noted on the policy itself. These policies must be read carefully before entering into any contractual obligation with an insurance provider. Before any policy is drafted, the insurance company makes its own assessment of the building. Here, the insurer weighs the risks and benefits involved in insuring a specific property. For instance, if a building is actively occupied and a tenant conducts business there regularly, the risks of vandalism and “malicious mischief” are relatively low. A vacant building, however, where no business activities take place, can be an easy target for vandals.
Insurance policies usually indicate that if a building is vacant or unoccupied for around 30 to 60 days, or more, then the policy won’t cover certain losses, such as damage done to the building by vandalism, “malicious mischief” and other destruction of property. It is absolutely essential for a property owner to be aware of these policy coverage exclusions as they vary from company to company.
This particular insurance exclusion has driven a lot of legal action between owners and insurance companies as of late. There is much back and forth between both parties in terms of the difference between “vacant” and “unoccupied.” If very limited activities are happening in the building, it might be “vacant” but not “unoccupied,” or vice versa.
Instead of budgeting for hefty lawyer fees, a smart investor should be proactive and make sure his or her insurance policy is clear with regards to unforeseen damages that may arise from vacancies. Is there a “vacancy exclusion” and if so, what isn’t covered in the vacancy exclusion?
In some cases, it may be a good rule of thumb for a property owner to notify their insurance provider if the building will be vacant or unoccupied. This information will usually lead to a reassessment of insurance coverage, which may bring about a renegotiation or cancellation of coverage, if the policy holder and insurance provider are not able to compromise on the contract revision. A savvy owner should read his/her policy and weigh out risks and benefits in relation to insurance policy exclusions before needing to file a claim, rather than after.
At SVN Vanguard, we are committed to helping property owners and tenants alike. Do you have a vacant Orange County commercial property? We are experts in Orange County Commercial Real Estate For Lease and Sale. SVN Vanguard has headquarters in Orange County as well as San Diego. We happily serve all of Southern California. Contact us for a property evaluation, leasing information and more.