For agents and brokers looking tobreak into the Vacant Buildings market category, or to expand theirexisting book of business, here's a look at the latest trends andkey coverage needs.

UNIQUE EXPOSURES DRIVE (USUALLY) HIGHERRATES

Commercial property owners often (but not always) face increasedinsurance rates when their building is considered “vacant,” acategorization that comes, depending on the specific terms of thepolicy, when occupancy falls below a certain threshold—typicallywhen only 25-31 percent of the square footage is occupied.

A standard ISO Property policy states that if a building isvacant for more than 60 days, there are certain limitations ofcoverage that kick in, and specific perils are eliminated:vandalism; theft (including damage from attempted theft); sprinklerleakage; glass breakage; and water damage from bursting pipes.

A carrier may also place a 15-percent penalty on a client thatfails to report its unoccupied status; that means for any claimsstill covered, like fire, the carrier will pay only 85 percent ofthe losses for the fire claim.

“Once you have a vacant building,the owners need to notify their broker so we can place a vacancypermit with their current carrier. Or [if the carrier decides tocancel coverage] we can go to a surplus-lines carrier and get avacancy policy to cover you for all those perils,” says Jay Little,senior vice president at broker Lockton Cos. in Kansas City.

If the carrier opts to add the vacancy permit to the client'sexisting Commercial Liability policy, this will negate the vacancyloss provisions in the standard form, says Chris A. Zoidis, vicepresident of the Special Risk Division at Burns & Wilcox.

“All those limitations around theperils and the 15-percent penalty on the policy no longer apply,”Zoidis says. “In exchange, the carrier will typically increase thepremium because, in their view, the hazard has increased.”

Cases do occur, however, when an unoccupied building might beseen to have a lower exposure. “If vacancy causes flammablematerials to be gone—for example, if the restaurant cooking isgone—the exposure to that loss has gone away,” Zoidis notes.

Most commercial owners don't understand how a building'soccupancy status can change their exposures, and so they must relyon their retail agent to educate them up front about thepossibility.

“I think a large number of owners or even the person wearing therisk-manager hat may not fully understand what the vacancyrestrictions are in their policy,” says Mark DeLawter, real estatepractice leader at Zurich North America Commercial. “We're seeingso many risk managers wearing different hats within an organizationthat they're not up on it. In some cases, they're relying on anoutside agent.”

Zurich, for its part, does not have vacancy restrictions on itsProperty form but will add them in at times, DeLawter says. “Mostof our competitors have the vacancy restrictions built into theirform. Our underwriters look into the risk, and if we feel we needto restrict coverage, we will.”

COPPER THEFT SPURSCLAIMS

Some of the major losses among insurers of vacant buildings arevandalism claims, many of which are a result of copper theft.

Copper prices have skyrocketed in recent years, along withgeneral vandalism claims, as thieves target these abandonedbuildings for copper wiring and pipes. Big losses have not been forthe valuable metal itself but for the damages done to the buildingto get to it.

With one client, thieves “went into the building and for 24hours ripped every piece of copper wiring and piping out of thewall,” Zoidis says. “The actual loss of the copper was $100,000.The damage to the building was $600,000.”

A Lockton client had a break-in where thieves stole copperplumbing from a building with an active water supply. The water ranthroughout the building for three days before anyone found it,Little says.

“Obviously, because the price of scrap copper is as high as itis, we've seen people take anything of value as far as copper isconcerned: plumbing, wiring—and risking their own personal safety.In some cases, it's live wiring,” says DeLawter. He recalls onecase in which thieves dressed in maintenance uniforms entered abuilding as if they were working on it. They pulled out all thecopper wire, ripping down walls and destroying drop ceilings.

CREATIVE OCCUPANCIES REDUCE VACANCIES

While the insurance market for Vacant Buildings coverage hasbeen hot since the Great Recession began in earnest, it isbeginning to cool somewhat. 

Part of the drop-off in demand is due to building owners“getting creative with their tenancy” and making temporaryarrangements to use the buildings, says Jeff Shearman, senior riskengineering consultant, real estate, for Zurich Services Corp.

“More people are starting to refocus theproperty. It may have been an old industrial-manufacturingfacility, and now you have a new tenant come in,” saysShearman.

These days, he explains, more insurers are willing toaccommodate commercial-building owners who can create new uses fortheir unused space by subdividing or completely changing theusage.

By subdividing, these owners aretaking a space designed, say, for warehousing and using it for anentirely different class of tenant—such as an indoor mall—ordividing up the space for smaller retail outlets ormanufacturers.

That can impact the owner's insurance rate depending on theoriginal intended use of the property, says DeLawter.

For example, an insurer would be more concerned when a buildingis designated for one type of manufacturing and the owner brings insomething that's more hazardous, where the existing insuranceprotection would be inadequate.

BIG, BEAUTIFUL…AND EMPTY

One of the most notable trends in the insuring of vacantbuildings has been in the type of vacant property being insured:mostly new construction that is well-maintained but empty.

In 2011, with signs of a recovery taking hold, constructionspending on commercial real estate rose more than 12 percent over2010, to $92.3 billion, according to a report published in May ofthis year by the National Association of Industrial and OfficeProperties Research Foundation.

The report, “How Office, Industrial and Retail Development andConstruction Contributed to the U.S. Economy in 2011,” states thatdevelopment and construction of commercial real estate (offices,industrial and retail buildings) “rebounded” in 2011—the first yearto see gains since the recession began in 2007.

The problem is renting some of those new structures has been achallenge for property owners, who find themselves stuck with emptyoffices.

“Right now we're seeing a higher [quality] level of vacantbuilding” DeLawter says. “Ten to 15 years ago, you were seeingrun-down, not-well-kept properties for the most part. With theGreat Recession, we're seeing all kinds: not only run-down, butalso trophy properties.”

In some cases, he says, it's brand-new construction where theowner just can't find people to move in: “These are well-protectedproperties and are well-constructed; they just don't have people tolease the space.”

Underwriters are looking at each property individually, DeLawtersays. Shearman notes the first consideration is whether thebuilding is expected be back in service in six months.