Whether it’s delayed renovation plans or ownership transitions, your investment property may become vacant. These circumstances pose additional risks for property owners.
Unfortunately, standard commercial property insurance policies may exclude vacant properties from many important coverages. To protect your real estate investments, you can secure vacant commercial property insurance.
In this post, you’ll learn more about vacant commercial property insurance, what it covers, and why it’s important for your business.
What Is Vacant Commercial Property?
Vacant land and vacant buildings are two types of vacant commercial properties.
Vacant land includes undeveloped property or lots. Land may stay vacant for months or even years before it is commercially developed. If you own an empty lot that you haven’t developed yet, you own vacant land.
Vacant buildings are empty buildings without occupants. Sometimes, the term “unoccupied property” is used to describe buildings that are empty of occupants but contain furniture and other personal items, while the term “vacant property” may be used to describe empty buildings that have no occupants or furnishings. Many insurance companies have different methods of determining whether a property is 'occupied' vs. 'vacant'.
Some insurance companies may be comfortable insuring light renovations, but underwriting guidelines will vary between markets, and some insurance carriers may view a building undergoing renovation as a 'builder's risk' which is a separate type of insurance coverage.
Why Do You Need Vacant Commercial Property Insurance?
Standard commercial property policies often have a vacancy clause that excludes coverage if a property is vacant for a certain period of time. For example, if a property is vacant for 60 consecutive days, the insurance company may not cover various losses associated with vacant properties.
Vacant properties are especially vulnerable to criminal activity, including vandalism and theft. Arson is another major threat. A National Fire Protection Association report found that an average of 30,200 structure fires occurred each year, resulting in $710 million in direct property damage per year. Many of these fires were the result of arson: half of the vacant building fires were set intentionally, while only 10% of all structure fires were set intentionally.
Understanding Vacant Commercial Property Insurance Coverage
Vacant commercial property insurance can provide general liability and commercial property coverage.
General liability insurance provides coverage for certain claims from third parties. For example, if someone is injured on the property, general liability insurance can cover the resulting medical costs and litigation.
Commercial property insurance for vacant properties provides coverage for an array of loss events that result in damage to the property. These losses can include acts of vandalism, fires, and storms.
It’s possible to secure general liability or commercial property coverage, but in many cases, you’ll want both coverages to protect your business. As with any insurance policy, read the terms carefully to understand the limits, exclusions, and requirements.
Property Risk Exposures for Vacant Buildings and Land
Many common scenarios exist to file a claim under a commercial property or general liability insurance policy for vacant properties. Consider the following examples:
- Squatters break into a vacant building. Whether they’re present for a single night or several weeks, they can cause considerable damage to the building.
- Someone sets fire to a vacant building. Vacant properties are frequently targeted by arsonists.
- Children trespass onto vacant land to play. While they play on your land, one of them is injured, and the parents may decide to sue.
- A storm hits a vacant building. The roof is damaged and rain seeps into the structure, causing water damage. Because the building is unoccupied, the damage may not be noticed immediately.
Common Factors Affecting Coverage Limits and Policy Costs
How much you pay to insure your commercial vacant property will depend on several factors. Circumstances that impact your level of risk, such as your location and proximity to the coast, can affect your rates.
You can help keep your rates down. Consider implementing strong risk management policies. For instance, you can add security measures, like fences and locks, to prevent or detect unauthorized or unforeseen activity at the vacant property.
Your coverage limits and terms will also impact your rates. When deciding how much coverage is necessary, consider the current value of your property. A replacement cost policy will provide coverage for the cost to rebuild using comparable building materials, while a policy that offers actual cash value may provide a smaller payout due to the impact of depreciation.
For general liability coverage, keep in mind that lawsuits against businesses can reach substantial sums. Securing higher limits will result in higher premium costs, but it will also provide more coverage.
In addition to the premium required to purchase coverage, you should consider the deductible. The deductible is the portion of the claim that you will be required to cover out of pocket. You can generally secure a lower premium rate by agreeing to a higher deductible, but you will need to pay more if there is a claim.
What's a Vacancy Exclusion Clause?
A vacancy exclusion clause is a provision in a property insurance policy that suspends coverage for property determined to be vacant at the time of the insurance loss. Standard policies define a vacant building as a structure with less than 31% of its square footage rented out or in use for normal operating activities for a period of 30 or 60 consecutive days. If a building qualifies as vacant, then it's excluded from coverage.
Occupied or rented properties have lower risks of damage, theft, and vandalism. In contrast, vacant buildings have a higher exposure to these risks. Therefore, insurance companies include a vacancy exclusion clause in standard commercial property policies.
This provision withdraws coverage for certain damages or losses in vacant properties. Typically, it excludes losses arising from theft, attempted theft, vandalism, water and sprinkler damage, and building glass breakage. That’s why it’s critical for business owners to get specific insurance coverage for vacant commercial property.
Tips to Manage Risk of Vacant Commercial Property
If you expect your property to remain vacant, inform your insurance agent and start taking protective measures.
Consider a vacancy permit endorsement to your commercial property policy. This endorsement provides recourse if your building experiences an insurance loss when vacant. The vacancy permit suspends the exclusions and extends coverage for theft, water damage, and vandalism for a defined period.
Business owners also can adopt several measures to mitigate the risk of loss of coverage.
- Keep up to date on building maintenance in HVAC, refrigeration, and sprinkler systems to prevent coverage loss due to non-functional safeguards and systems.
- Maintain an expert insurance broker who understands your property portfolio's requirements and the technical aspects of commercial property insurance.
- Always ensure your surveillance and alarm systems, such as security cameras and fire alarms are working.
Protect Your Vacant Commercial Property
Vacant properties expose your business to various risks. Commercial property insurance helps protect your investments. Pathpoint offers vacant commercial property insurance policies for terms of three, six, nine, or 12 months. Contact your insurance agent and ask them to get you a Pathpoint quote today.