It’s been going on forever, so it seems.
The empty storefronts. The abandoned homes. People out of work desperate just to not lose their homes that they have worked so hard to buy, or in some cases, bought with little money in their pockets, trying to live the American Dream. But nothing seems to be able to stop the clock on economic times. According to “International Business News” total foreclosures in 2009 reached 2.8 million, which was a 21% increase over 2008 and a 120% rise compared to 2007. Hardest hit, amongst the states are California, Florida, Arizona and Illinois that account for 50% of the total foreclosures. As the number of foreclosures is on the rise, the number of people renting homes and commercial properties is on the rise, as well. Foreclosures have become such common place that even the ACORD Application asks the questions:
Has the applicant had a foreclosure, repossession, bankruptcy or filed bankruptcy during the past five (5) years?
Has the applicant had a judgment or lien during the past five (5) years?
During the last five (5) years has any applicant been indicted or convicted of any degree of a crime or fraud, bribery, arson or any other arson-related crime in connection with this or any other property?
And the ACORD Application then contains the warning that “Failure to disclosed the existence of an arson conviction is a misdemeanor punishable by a sentence of up to one (1) year of imprisonment.” Strong language for hard times but the reality is that arson is on the rise; homes have multiple liens so that ownership has become convoluted; and fraud/crime has taken on new dimensions. This is true for both owners of homes AND businesses who have been further impacted by reduced consumer spending; frozen credit markets; and an internet revolution of shopping that has changed the brick and mortar storefront into a vacant building prominently displaying a “going out of business” sign in the window.
The reality is that homes can be vacant or un-occupied for a variety of reasons and in some cases there are remedies in insurance. One of the first problems in this discussion is that on a standard Homeowners Policy there is no definition of either vacancy or un-occupancy. In Commercial Property Forms there is a definition of what is considered a vacant property for both a tenant and a property owner so that it is less ambiguous. Let’s begin with the Homeowners issues and solutions.
1. The insured may have a seasonal residence that is furnished (ready for occupancy) but is a second home.
Problem/Solution(s): Issue a separate Homeowners Policy with a seasonal endorsement
Problem/Solution(s): Add the seasonal residence to the primary Homeowners Policy if one exists and add a seasonal endorsement Problem/Solution(s): IF the secondary residence is ALSO rented to others on an occasional basis then the policy would be endorsed accordingly.
2. The insured has a secondary residence that is rented out to others.
Problem/Solution(s): This would not qualify for a Homeowners Policy because the owner is not in “residence”. A Dwelling Policy would be issued and Liability would either be added to the Dwelling Policy or added to the primary Homeowners Policy.
3. The insured may have just purchased a home AND a Homeowners Policy is put in force in order to close escrow. The insured may intend to move into the home immediately but does NOT move in for a couple of months. This could be for a number of reasons:
Issue: The insured may be re-locating and it takes more time then intended.
Issue: The insured may intend to make improvements to the home prior to moving in that takes more time then intended
Problem/Solution(s): In both cases, if the insured is NOT in residence, the policy might be nullified based on the application OR if there were a loss the policy would not pay for certain situations such as vandalism; attempted theft; water damage. The insurance company must be notified and they may allow the vacancy for an additional premium OR request cancellation, in which case the policy would have to be re-written with an insurer that allows for a home to be vacant.
4. The insured may have to be out of the residence for a long period of time thus leaving it un-occupied. A good example of this would be an elderly person who has gone into a nursing home, intends (wants) to move back, and is keeping the residence. The problem here is that the policy may have been in effect for some time; automatically renewed; and the insurance agent and/or company has never been notified. This situation could go on for years.
Problem/Solution(s): If an agent is made aware of the situation, the insurance company must be advised. The insurance company may cancel the policy and re-write the coverage on a Dwelling Program with Liability attached or written separately. It is a requirement to the policy that the owner is in residence and in this case that requirement has not been met.
5. The insured may have vacated their home because they could not make their payments. They have used “jingle mail” which is a new term for when the owner just mails back the keys to the bank. They have failed to pay the policy and it has been cancelled for non-payment.
Problem/Solution(s): The insured still owns the property and is responsible to insure the home. If there are contents left in the home it is their sole responsibility to insure them. The bank will most probably purchase forced insurance on the home to protect THEIR interests which would cover their loan. This may not adequately protect the homeowner and they will still be charged for this policy. Liability for the home must be purchased by the homeowner to protect their liability to risk.
6. The homeowner may have stopped payments and may even had their home foreclosed BUT still lives there. This is not uncommon for a homeowner to continue to live in their foreclosed home until the bank kicks them out. In some states, banks will pay “cash for keys” and allow the prior owner to continue to live there rather than go through the cost of eviction and face the possibility of the prior owner from doing damage and “stripping the home”.
Problem/Solution(s): The insured has no doubt cancelled their Homeowners Policy or had it cancelled for non-payment. The bank may have placed coverage to cover their interests. The prior homeowner still must carry their own insurance for any contents they have and continuing liability exposure as they are in residence. This may be difficult coverage to secure since the prior owner is not really a “tenant” as they are not paying rent. They are in fact “squatters” which could prove difficult to insure.
The issues relating to the vacancy and un-occupancy for the commercial property has some of the same issues as with the homeowner but there are some more readily available solutions. To begin with, commercial property forms distinguish themselves with a definition of vacancy for both a tenant and a property owner. The ISO form states:
(1) As used in this Vacancy Condition, the term building and the term vacant have the meanings set forth in (1)(a) and (1)(b) below:
a) When this policy is issued to a tenant, and with respect to that tenant’s interest in Covered Property, building means the unit or suite rented or leased to the tenant. Such building is vacant when it does not contain enough business personal property to conduct customary operations.
b)When this policy is issued to the owner or general lessee of a building, building means the entire building. Such building is vacant unless at least 31% of its total square footage is:
(i) Rented to a lessee or sub-lessee and used by the lessee or sub-lessee to conduct its customary operations; and/or
(ii) Used by the building owner to conduct customary operations.
(2)Buildings under construction or renovation are not considered vacant. If the building is deemed to be vacant for more than 60 consecutive day before the loss occurs for either the tenant or the building owner then the policy provides that there will be no coverage for specific perils such as vandalism, sprinkler leakage, building glass breakage, water damage, theft or attempted theft. If the loss is caused by perils other than those listed then the policy will reduce the amount payable by 15%. The commercial property form series has two different endorsements that can be used to address the issue of vacancy beyond sixty days. The first endorsement is the Vacancy Permit. As the name of the endorsement would imply, the endorsement allows the property to be vacant beyond sixty days. It is typically written for specific time frames. There is typically a separate charge to add back in vandalism and sprinkler leakage to the vacant property. The second endorsement is the Vacancy Change Endorsement. This endorsement changes the percentage provided in the policy of 31% at which point the building that is rented is considered vacant. That percentage can be reduced to as low as 10% which then allows coverage to continue without reduction of loss payment or elimination of certain covered perils at a much lower occupancy requirement.
No discussion of vacancy and the commercial property risk would be complete without discussing Business Income and the vacant building. A Business Income form is an “actual loss sustained” policy and the ISO form specifically states:
“We will pay for the actual loss of Business Income you sustain due to the necessary “suspension” of your “operations” during the “period of restoration”. What is important about this statement is that an insured would have to prove that they actually sustained a financial loss due to the peril causing the physical loss. The form provides under the Loss Determination section that:
The amount of Business Income loss will be determined based on:
(1) The Net Income of the business before the direct physical loss or damage occurred;
(2) The likely Net Income of the business if no physical loss or damage had occurred, but not including any Net Income that would likely have been earned as a result of an increase in the volume of business due to favorable business conditions caused by the impact of the Covered Cause of Loss on customers or on other businesses;
The test, based on this language would be for the insured to be able to demonstrate what their actual income and/or rents would be during the loss period based on past experience and realistic projections. The insurance policy has not intent of making up for financial loss due to the economy of the insured’s individual economic situation but rather is measured by the impact of a covered cause of loss on the insured ability to earn what they would have earned had no loss occurred.
In summary, the issue of vacancy and un-occupancy has a significant impact on both personal and commercial lines policies. It is essential in both cases that agents follow underwriting guidelines provided by their insurance companies; that they complete the applications accurately and do not withhold any information; and, that when appropriate the agent finds appropriate insurance coverage for their clients even if it means charging more premium.