At a Coverage Crossroads: Vacancy, Vandalism, and Fire

old abandoned building

By Laura Machado, CIC, CPCU

Property vacancy has been a growing problem in recent years. The recession reduced the demand for new buildings leaving many beautiful, well-maintained, new developments empty. New construction came to a virtual standstill. Current property loans were going into default as businesses closed. Tenants downsized into smaller locations with lower overhead, leaving the building owner on the hook for the unused property. The year 2011 witnessed signs of recovery with an increase in new construction. However, even today, many property owners are still struggling to fill the spaces that are complete and ready for immediate occupancy.

The problem is further exacerbated as property owners, as well as tenants, are faced with serious coverage limitations when their properties are left vacant. The term “vacancy” is clearly defined in the ISO Building and Personal Property Coverage Form (CP 00 10 10 12). For property owners, a building is considered vacant if less than 31% of the square footage is occupied. For commercial tenants, the unit or suite rented or leased is considered vacant when it does not contain enough business personal property to “conduct customary operations.”

The vacancy provision in the Building and Personal Property Coverage Form outlines the coverage restrictions associated with vacancy, which exclude the causes of loss to which vacant buildings are particularly susceptible—including vandalism, glass breakage, and theft. All other covered causes of loss are paid at a 15% reduction of what would otherwise have been paid.

In light of this information, a question came up recently regarding a certain ambiguity surrounding the vacancy provision. Consider this scenario: Vandals break into a building left vacant for over 60 days. They spray-paint graffiti throughout the interior, shatter several windows, and destroy whatever property was left behind by owners and former tenants. The vandals also start a fire in the building, causing extensive damage to the structure.

While there is little room for dispute regarding the exclusion of the graffiti, glass breakage, and property damage, the questions surrounding the fire damage are complex. Is the fire considered a separate peril, covered at the 15% reduction, or is it excluded because the damage, including the fire damage to the vacant building, was caused by the peril of vandalism? The Business and Personal Property Coverage Form does not specifically address the situation as clearly as it does in regards to other exclusions such as nuclear hazard, which reads, “but if nuclear reaction…results in fire, we will pay for the loss or damage caused by that fire.”

Fire and vandalism are two distinct causes of loss listed in the policy; however, there is no specific verbiage to support or deny that fire caused by vandals is covered as a separate peril, rather than excluded from coverage with the peril of vandalism. It would seem that such ambiguity would, in fact, fall in favor of the insured, as numerous court cases have settled similar ambiguity in that manner. However, the existing case law lends support to either position in this scenario— both covered and excluded.

In Nationwide Mut. Fire Ins. Co. v. Nationwide Furniture Co., 932 F. Supp. 655 (E.D. Pa. 1996), a fire was caused by vandals at the insured premises, which had been left unoccupied. Nationwide Mutual denied coverage under the vacancy provision, determining that the building had been left vacant for more than 60 days and the damage was caused by the excluded cause of loss—vandalism. The insured not only denied that the building was vacant, but further argued that even if the building was vacant, the damage was caused by the covered cause of loss—fire—and that the term “vandalism” was ambiguous and must be interpreted in favor of the insured. A legal battle ensued as the insurance company filed a declaratory judgment action and the insured filed a counter-suit seeking payment for the loss, as well as for bad faith.

The court subsequently agreed with the ambiguity of the term “vandalism,” charging that the insurer could have defined vandalism to include non-accidental fire in order to clarify the intent of the exclusion. However, in several other cases, courts have ruled that the “common sense,” “usual and ordinary,” and “plain and ordinary” meaning of vandalism includes fire and is, in fact, excluded. In Potomac Ins. Co. of Illinois v. NCUA a/k/a National Credit Union Assoc., 1996 WL 396100 (N.D.Ill.1996) for example, the court considered the dictionary definition of the term vandalism, and concluded that the ordinary meaning of the word does include arson, and therefore, the vandalism exclusion applied.

So, what are the available remedies to protect property owners from being caught in this complicated conundrum of vacancy, vandalism, and fire? Although the economy continues to improve, vacancy remains a significant issue among building owners and tenants. In fact, even in the best economies, vacancy will occur and create coverage gaps for insureds.

The first step in addressing this potential pitfall is knowledge. Even the most savvy property owner may not understand all aspects of the complex property insurance policy. It is also true that vacancy can catch a property owner off-guard if a major tenant suddenly goes out of business or moves, leaving the space empty, or mostly empty. It could easily take more than 60 days to locate a new tenant and execute the necessary contracts. Understanding what constitutes vacancy and the potential ramifications in the event of a loss will empower property owners to take proactive steps with their insurance agents to protect their investment.

Agents should take the time to clearly explain the vacancy provisions to their customers, even if the customer insists that it could never be a possibility. Keep the lines of communication open by inviting your customers to stay in touch. Continually reach out to your customers throughout the policy term—not just at renewal time.

There is a more aggressive approach for protecting insureds from vacancy exposures, especially if vacancy is a more immediate concern for property owners or tenants. Endorsements are available for the Building and Personal Property Coverage Form (CP 00 10) to help treat the coverage shortfalls associated with vacancy. ISO endorsement form Vacancy Permit (CP 04 50) allows coverage to continue at full value when a building is deemed vacant beyond 60 days. ISO endorsement form Vacancy Changes (CP 04 60) allows the 31% occupancy criteria to be reduced to as low as 10%. In using these endorsements to reduce or eliminate the vacancy exclusion, the question of fire vs. vandalism becomes a non-issue. Coverage continues at full value for an additional premium.

Keep in mind, however, these forms are optional. Individual carriers may or may not offer these forms to policy holders, or there may be underwriting restrictions for certain accounts. They may offer different endorsements with minor, or even significant, variations from the ISO forms, or they may not offer any vacancy remedy at all. Discussing the acceptability, coverage, and restrictions with your underwriter and/or claims professional will help you gain insight on how these endorsements will be applied. However, it is also imperative that you read the forms carefully in order to discern the details and convey this information accurately to your customer.

So, back to our original scenario and our original question: Is fire started by vandals covered as a separate peril, at the 15% reduction, or is it excluded because the damage to the vacant building is caused by the peril of vandalism? The answer in this case is… “It depends.” Until the ambiguity of the term “vandalism” is resolved once and for all, the best defense is a good offense. Knowledge and a proactive approach to the prevention and treatment of vacancy can make the difference between coverage, no coverage, or reduced coverage.

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Insurance Essentials

CIC Commercial Property Institutes and CISR Insuring Commercial Property Courses are both excellent options for learning more about various commercial property coverages and exposures. In addition, The Academy’s book, P&C Insurance Essentials, contains several chapters devoted to commercial property insurance.

Laura Machado, CIC, CPCU, has over twenty years of experience in the insurance industry. She has been an Underwriter Manager in Personal Auto, Commercial Lines, and Workers Comp, as well as a Content Manager for an online insurance news publication.

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