Vacant buildings

Difficult economy creates growing need for coverage

By Phil Zinkewicz

In one of Sir Arthur Conan Doyle’s Sherlock Holmes stories, “The Empty House,” Holmes uses a vacant building as a lure to capture one of his archenemies, and he is successful. Empty edifices—mansions, castles, houses on haunted hills, etc.—have always offered an air of romance in literature. The creaky staircases, the hidden rooms and the pitched roofs all work to create at atmosphere of excitement and danger.

However, in the real world, vacant buildings, both residential and commercial, are not very romantic at all. They could represent potential losses for insurance companies that choose to take on the exposures. If left unattended, a burst water pipe in the dead of winter, incidents of vandalism and even arson could mean heavy losses to insurers who decide to provide coverage for vacant buildings. However, if underwritten properly, vacant properties could mean profits for insurers.

In recent years, insurers—especially in the excess and surplus lines market—have been looking favorably on vacant buildings. Especially in today’s economic climate, vacant buildings are being looked upon as a growth area in the insurance industry.

Jeanette Guercio, vice president/property for American Safety Insurance, says that her book of vacant properties is entirely in commercial risks. “Although we are a national company, we have seen the greatest growth areas in the Northeast and Southeast,” she says. “Because of the economy, the number of retail establishments that have gone out of business has increased. Last year, closed retail establish­ments represented about 11% of our book. This year, as of June, it represented about 25% of our book.”

Guercio says that vacant buildings were once considered primarily E&S market exposures, but today the standard market is looking at the business. “It’s a very soft market out there,” she says. “Rates have decreased, albeit not dramatically.”

Vacant structures can be profitable for insurers as long as they are underwritten properly, according to Guercio. “We look at each risk on its own merit. We want to know how long the building has been vacant and whether mortgage and tax payments are current. We find this a very profitable line of business.”

Keith Allred of TAPCO Underwriters, Inc., describes his firm’s approach to writing vacant properties. “We have been writing a vacant program since 1999, and we are recognized in the industry as a major player,” he says. “Our book of vacant business consists of both residential dwellings and commercial buildings. More than half of our vacant book is written on a package basis, including both property and liability. We believe that most retail agents find it advantageous to provide their clients with a package policy when insuring vacant properties. Our low rates and minimum premiums allow our retail agents to offer both coverages at a very reasonable price.”

Allred points out that, over the past couple of years, the real estate market in general has yielded an increased demand for vacant property coverage given the number of vacant properties for sale. “In order to capitalize on this opportunity, we have worked diligently to secure additional capacity and aggregate, which allows us to maintain our status as one of the largest writers of vacant properties in the country,” says Allred.

“We have three primary markets where we place vacant business—Lloyd’s of London, Scottsdale Insurance Co., and Colony Insurance Co. We have actually negotiated special pricing and coverage terms with each of our markets, which enables us to offer our retail agents solid coverage with very financially sound markets. In fact, we have one of the largest vacant property programs in Lloyd’s.”

Allred says that rates have gen­erally decreased for vacant properties over the past two years due to increased competition among carriers. “TAPCO has in-house binding authority up to $2 million for vacant property and can secure quotes for up to $10 million in values.”

Continues Allred: “Many of our retail agents have developed personal relationships with financial institution representatives. They are familiar with our appetite for vacant properties and can reassure their financial institution clients that they can provide an easy avenue in securing necessary coverages on demand.”

Allred explains TAPCO’s approach to vacant business thus: “As with all classes of business we quote and bind, and our goal is to always be the retail agent’s logical choice for their vacant property needs. Our approach is based on the same simplified Call-Quote-Bind approach we use for all lines of business. Retail agents can simply call any of our offices and speak ‘live time’ with one of our underwriters. Our underwriters can quote vacant properties over the phone via TAPCO’s proprietary quote/bind system.

“That system allows our underwriters to instantly rate and shop the desired coverage among all available markets,” Allred continues. “Most phone quote calls average around three minutes in duration and before the call ends, our underwriters e-mail the retail agent a quote proposal and all necessary forms to bind the quote. Our retail agents find this way of quoting advantageous over having to complete and submit an application in order to obtain a quote.”

What happens if a financial institution holds the mortgage on vacant property where the borrower’s insurance coverage has lapsed or is non-renewed? For this contingency, there is something in the real estate insurance industry called “Forced Place Coverage.” Crump Insurance broker Sim Therrall says that, in the current economy, financial institutions and their agents should be aware of this product and the need for it.

Forced Place Coverage comes into play when the mortgage holder finds that the borrower has not provided the insurance coverage in the mortgage agreement, says Therrall. “When a mortgage holder discovers this, the financial institution has the right to buy the necessary insurance and then bill the borrower. Typically, the number of loans that fall into this category is small. However, because of the current economy, we’re seeing Forced Place Loans on the increase.”

Therrall says that Crump provides a market for Lender Placed Asset Protection, which governs Forced Place Loans. “We provide direct, online access to the product to make it easy for the lender. There is one policy with guaranteed acceptance for every piece of property with the same coverage, the same perils and same deductibles. We provide limits that conform to the lender’s portfolio of loans. Limits can be as little as a quarter-million dollars or as high as $10 million.”