The vacant building marketplace, which had been relatively steady, is now growing. The 2000 United States census lists vacancy rates for individual apartment units and seasonal properties but not for commercial properties. The National Vacant Properties Campaign (NVPC) confirms this lack of information and states that most communities do not have accurate counts of the vacant and abandoned properties in their midst.

Vacant and unoccupied buildings are problems, not only for their owners, but for adjacent and adjoining properties as well. NVPC reports that neighborhoods with vacant structures produce 3.2 times as many calls to the police reporting drug activity and 1.8 times as many concerning thefts as neighborhoods without vacancy issues. More than 12,000 fires occur in vacant structures every year, of which 70% are suspected to be caused by arson.

To better understand the coverage concerns, consider this example:

Middlemarsh, Inc., owns three strip shopping centers. The primary tenant at one of them does not renew its lease and three other stores, each of which depend on that lead tenant for business, announce that they also will not renew their leases. All of them move out on June 1, 2008. Middlemarsh negotiates with a number of prospective tenants but when the building is vandalized in November, the claim is denied because it was less than 30% occupied at the time of the loss.

There will always be a need for coverage on vacant buildings. Dwellings and commercial buildings alike become vacant for a number of reasons. When they do, coverage availability through the standard insurance markets dries up. When underwriters learn that a property is vacant, cancellation or non-renewal notices usually follow shortly afterwards. On the other hand, if the underwriter does not learn of the vacancy and coverage remains in place and unchanged, claims may be denied due to policy terms and conditions. Agents that become aware of vacancies must be proactive to protect both their clients and their carriers.

The good news is that a number of markets are very interested in writing vacant structures. Evans Nash, vice president, property, at Markel Essex, states that they have been writing vacant properties for 25 years through designated wholesalers. They are seeing an increase in demand at the present time that he believes is driven by the current epidemic of foreclosures. Ken Kukral, president of International Excess, has been writing excess and surplus business for over 22 years and says that insurance products for vacant buildings have always been part of the market. When Roush Insurance Services, Inc. started its operations in 1990, Melanie Derzhavets, president, comments that insurance products for vacant properties were part of their offerings but there is increasing demand for this coverage at the present time. She observes that she is seeing both personal and commercial clients requesting this coverage due to foreclosures and their inability to obtain the financing they require. According to Joseph Surette, the director of sales and marketing at AI Risk Specialists Insurance, Inc. vacant properties have been a part of their suite of Personal Lines products for many years.

Mr. Surette points out that while the vast majority of vacant properties are written on nonadmitted paper there are some admitted markets who do offer coverage. Mr. Kukral believes that most vacant properties are written on nonadmitted paper because of greater pricing flexibility and because there are few standard carriers interested in writing these risks. Ms. Derzhavets has only one carrier writing vacant properties on an admitted basis and four doing so on nonadmitted paper. She agrees with Mr. Kukral that this is due to rate and form filings requirements.

According to Ms. Derzhavets, one issue underwriting vacant property is balancing the amount of money outstanding on the loan versus the value of the property and hence the amount for which the carrier is willing to insure it. One problem is that banks extended credit for the value of the land as well as for the value of the property. Doing so has led to the point where the mortgage is literally upside down, to the extent that the amount of the loan is far greater than the value of the buildings situated on the land. Insurance carriers are not interested in insuring cases where the building is overinsured to compensate for the value of the land because so doing could create a moral hazard.

Click here for the complete article … 

BROKERS    
MANAGING GENERAL AGENTS    
INSURANCE COMPANY MARKETS