A good understanding of the meaning of "vacant" and the special provisions in commercial property insurance pertinent to that condition ensures proper coverage and, with the insured's cooperation, minimization of exposures. Guidelines can be found in dictionary definitions of the term, the provisions of commercial property policies, and the conclusions of higher courts.
In Cotton States Mutual Insurance Company v. Smelcer,1994, the Georgia Court of Appeals pointed out that the average policyholder's understanding of the meaning of words is paramount. The court stated that "vacant" is readily understood in its plain, ordinary sense and that dictionaries supply such meaning. Accordingly, we took a sampling of definitions with the following results:
* The World Book Encyclopedia Dictionary: "Empty" or "not filled."
* The American Heritage Dictionary: "Containing nothing, empty."
* The American College Dictionary: "Having no contents, empty, void."
Within the context of insurance coverage, policies contain specialized definitions of various terms, and coverage is tailored or modified for often-changing exposures. This is especially true in regard to the problem of the vacating of a building--or part of it--during the term of property insurance. How is coverage affected?
The manner in which building vacancy is treated by insurers can be understood by referring to Building and Personal Property Form CP 00 10, drafted by the Insurance Services Office for use in its Commercial Property Program, and to the Commercial Output Policy designed by the American Association of Insurance Services. Provisions of independently developed forms used by some insurers are similar but should be checked for specifics.
AAIS has included a vacancy or unoccupancy clause in its COP that restricts coverage under such conditions by not covering losses caused by theft, attempted theft, breakage of building glass, sprinkler leakage (unless protected from freezing), vandalism or water damage for more than 60 consecutive days. The time limit is modified for seasonal property, for which coverage is subject to the 60-day limit or the usual or incidental occupancy period.
ISO's form contains a vacancy clause that restricts coverage by excluding losses caused by the same perils after 60 consecutive days of vacancy. The word "unoccupancy" is no longer used, as it was in previous editions of ISO forms, and there is no reference to "usual and incidental" with respect to unoccupancy of a seasonal nature. An optional vacancy permit (CP 04 50) is available to add back coverage for vandalism and sprinkler leakage for a specified time limit.
Note that payment for losses caused by perils other than those specified is reduced by 15% under both ISO and AAIS forms. This is logical and fair because buildings that are vacant for extended periods are vulnerable to vandalism and arson, partly as the result of only occasional maintenance and security oversight. (News accounts of fire damage to vacant buildings attest to this.)
Policy definitions of key words and modifications of their meaning for the application of insurance to losses are key factors in determining the scope of coverage. "Unoccupied" in AAIS forms means that the customary activities or operations at the covered location are suspended but business personal property has not been removed. The term is not used in ISO forms.
"Vacant" in AAIS forms means that the occupants have moved, leaving the building or structure empty or containing only limited business personal property. ISO has refined the term, making a distinction between building ownership and tenant occupancy.
When the insured is a building owner under ISO's CPP coverage, "building" is defined as the entire structure. The building is considered vacant when 70% or more of its square footage is not rented or is not used to conduct the customary operations of the insured. When the insured is a tenant, the definition of "building" is the unit or suite that has been rented or leased to the tenant. It is considered vacant when it no longer contains enough business personal property to conduct the customary operations of the insured tenant.
Court decisions have played a major part in the development of insuring provisions in insurance policies, and the manner in which they are applied in loss situations. Two recent decisions
at the appeal level expand our understanding of how vacancy bears on the scope of commercial property insurance coverage.
In the 1999 case Aguiar v. Assicurazioni Insurance Company, the Massachusetts Court of Appeals affirmed trial court judgment that extended vacancy of a restaurant beyond the time period specified in its insurance policy activated the policy's vacancy clause when fire destroyed the restaurant. The vacancy clause was required by state law. The insured's contention of reasonable expectation of coverage was found without merit.
In a 1996 decision, the Supreme Judicial Court of Massachusetts concluded in Pappas v. Commercial Industry Insurance Company that a policy vacancy limit spanned the date of renewal by the insurer with the same coverage and did not start anew, so that the insured could recover for loss during the term of the renewal policy.
In summary, commercial property policies in general contain a condition limiting or reducing coverage for certain causes of loss on a described building that is vacant beyond a period of (usually) 60 consecutive days, unless otherwise provided in writing.
Paying attention to coverage provisions and loss prevention will minimize claim problems. Discussing the vacancy clause with valued commercial insureds, especially those whose building property is leased to others, and stressing the importance of notifying the agent or broker when property is vacated is time well spent. If you receive such a notice, a vacancy permit endorsement may be in order. A client also will appreciate receiving a reminder of the pertinent policy provisions and the need to maintain protective safeguards and initiate other loss prevention measures. Proper insurance is essential, but any business that has incurred a substantial property loss will confirm that avoiding that loss deserves the highest priority! *
©COPYRIGHT: The Rough Notes Magazine, 2000