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When driving down the street, it is hard not to notice vacant buildings; some are new buildings, some are older buildings. Adam Roselli of Eric Fuller and Associates states that: “As of August 2012, the vacancy rate for Class A and B office space in Clark County was sitting just under 20 percent.” Recent news related to property damage caused by fire begs the question: From an insurance perspective, is there a difference in insuring a vacant building? We will explore those differences and discuss some strategies that building owners can take to limit their liability and ultimately control insurance costs.
When a building is vacant, insuring that building can often result in a reduction of coverage and an increase in cost. What variables contribute to these factors?
While there are a number of factors to consider, the first and foremost is a lack of a consistent presence. The most common losses on properties are typically water damage, fire and theft. Both fire and water damage often times start out as small – there is a small leak or there is a spark that turns into a fire. When you have vacancy, the building owner does not have someone who is there to catch those smaller events. When a tenant is in the building, the water leak is noticed and the property manager or a plumber is called to fix the problem. When there is an electrical spark or even the smell of smoke, a tenant is there to call the fire department and avert a large loss. As an insurance professional, it’s interesting to watch the news and recognize that often times, property losses happen at night in a vacant building because no one was there to catch the smaller event.
Along the same lines, when a building is vacant there is an increased probability of damage due to vandalism. The broken windows and ‘tagged’ walls are common place in vacant buildings.
Because of these factors, insurance on vacant buildings is often different. The cause of loss section in the policy can become more restrictive. For example, glass damage, theft or vandalism can all be excluded due to having a vacant building. With less coverage, the building owner may still find that the cost to insure that same building is three to four times the amount that was paid when there was a full-time tenant in it. It’s important to understand how the policy is written and what its limitations are.
Is there something that can be done proactively?
There are several solutions that building owners can implement to limit or eliminate the added exposure of a vacant building. One option that we have seen work successfully is to lease out the space to a nonprofit organization for a reduced lease payment on a month-to-month lease agreement. This can allow you time to continue to find the right long-term tenant and can allow the building owner to give something back to this great community. The outcome is that the building now has occupancy which greatly reduced its liability (and your insurance exposure and related costs).
A second solution is to make sure the building is not a target for thieves. Make sure all office supplies and equipment have been removed and that it is clear from the outside that there is not a bounty of equipment that can be easily accessed. Another consideration is proactively managing the utilities – from the water supply to the heating and lighting, each one can make a difference. Another strategy along those same lines is to make it harder for someone to get into the building. Either by boarding up windows or hiring an active security patrol, the probability of a break-in can be decreased.
It is important to be proactive and consult with your team of trusted advisors when you may be faced with holding a vacant building in a tight economy.
Tony Johnson is an Accredited Advisor in insurance and can be reached at Davidson Insurance, 360-514-9550 or Tony@Davidsoninsurance.com.