As we know, our business environment looks very different these days due to the COVID-19 pandemic. All non-essential businesses, offices and retail establishments have been closed in Pennsylvania and many other states for the last several weeks with no clear date on when they will be allowed to reopen. Most property policies have a vacancy provision that requires the building to remain occupied or coverage will be limited in the event of a claim. McConkey is proactively working with our carriers to ensure that our clients remain properly protected despite vacancy provisions that might exist.
For instance, if a building is deemed vacant, a standard property policy completely excludes coverage for vandalism, sprinkler leakage (unless you have protected the system against freezing), building glass breakage, water damage, theft or attempted theft. All other claims would be paid but the claim payment would be reduced by 15% because of the vacancy. As a result, it is important that we understand the definition of what constitutes vacancy on each property policy.
A standard property policy has two key qualifiers as to how the policy may respond. For a tenant who doesn’t occupy the entire building, such building is vacant when it does not contain enough business personal property to conduct customary operations. The limitation is a property-based limitation presuming that all the equipment and contents are still in the building, just not being used. Therefore, lack of use does not make it vacant, just presently unoccupied. Therefore, the vacancy limitation would not apply.
Coverage for building owners and lessees of an entire building is not as clear but the results seem to be the same. The vacancy provision does not appear to apply to owners or general lessees when operations are stalled provided that:
At least 31% of the total square footage is rented to a lessee and used by the lessee or sublessee to conduct its operations and/or used by the building owner to conduct customary operations. The form doesn’t say that these operations must be in use but requires that they must be present. It will be important for building owners to continually evaluate whether their buildings are 31% occupied as changes to tenant occupancy occurs.
The standard property policy references how the building is used and not when the building is used. The goal of the vacancy clause is to penalize only when/if the building cannot be used for its intended purpose because there is not enough business personal property to conduct business immediately. As long as operations can be conducted, the building is not vacant even if operations are not currently being conducted.
This all sounds simple and straight forward but what about insurance carriers that offer proprietary forms that may not mirror standard language? Some insurance carriers provide policy language for the vacancy clause that is activity driven meaning that a vacancy provision could apply after a certain number of days when activity ceases. With these policy forms, the clock begins to tick as soon as the business is shut down. That creates a coverage question that is a bit more complicated in order to understand how the vacancy provision might apply.
So what does this mean for you? Our McConkey team of professionals stand ready to assist you and guide you on your specific policy language and outline the coverage terms that can impact your property in the event of a loss while your operations are suspended. We can also provide valuable resources to help you protect your building and contents while you are away from your premises to help prevent and mitigate any property loss or damage. Additionally, McConkey is working with our individual carriers to suspend enforcement of these clauses if it could apply. While the insurance world is evolving based on this pandemic, our service commitment to you remains unchanged. Please stay safe and stay well and let us know how we can assist you.