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.

Mr. Kukral's opinion is that an important element of any vacant property is its story. “Why is it vacant? How long has it been vacant? Is it properly secured? Is the owner in financial difficulty?” He states that, “unless there is a truly hazardous exposure, there isn’t anything that can’t be written.”

A building can be unoccupied or vacant or, as Mr. Nash puts it, vacant or under renovation. He says that “a true vacant building is basically up for sale and there’s no actual renovating going on. Once renovations take place, the property and the liability exposures both increase since people are on the site doing wiring or replacing sheetrock.” Mr. Surette points out that some carriers use a time period to determine whether a structure is unoccupied or vacant. Unoccupied could be the first 60 day period, while more than 60 days of unoccupancy constitutes vacancy.

Policies are available for three or six month periods, as well as on an annual basis. In the past, many insureds purchased the three-month policy but, according to Mr. Nash, he is currently seeing an increase in the number of six-month and annual term policies being requested. His company prefers to limit coverage to no more than 24 months. Ms. Derzhavets observes that her carriers also provide coverage for flexible policy terms but “if a property is tied up in probate, we’ll write it for up to two years.” She adds that they need to know why a property is vacant and how it is being attended to. She emphasizes that they are not interested in writing coverage for a property manager who is miles away from the property and never checks on it.

In general, the marketplace is very open. Pricing is generally stable but is decreasing by as much as 40% in some markets. Ms. Derzhavets notes that, “because we’re in a soft market right now, we’re seeing more standard carriers coming into the market. It’s an area where E&S companies have good loss experience because their long history of writing this class has given them extensive data, enabling them to develop an expertise and set appropriate rates. They don’t want to lose any of their business because it’s a very good class.”

A number of factors go into pricing vacant properties. Mr. Surette says that the total insured value of the home, its location (coastal vs. inland) and weather-related factors are all important but a key element is the length of time the property has been vacant. Mr. Kukral says that one very important thing is where the risk is headed.

Mr. Nash shares that Markel Essex “is putting together a product that uses personal lines language which is a little easier for insureds to understand.”

Both commercial and personal lines customers are purchasing this coverage. While Mr. Kukral is seeing a number of referrals from banks, Ms. Derzhavets observes that many banks are creating their own insurance facilities that owners can access to cover their properties. She has also seen a return of an older product, known as single interest-special conditions, that protects the interest of the bank on foreclosed properties.

This is a difficult time for property owners. Some buildings are simply going to become vacant. However, it is encouraging to know that as long as the property owner maintains the building and keeps it in good repair the insurance marketplace stands ready to provide coverage on it.