The millions of homes that remain vacant are a stark reminder of the severity of the housing crisis that began in 2007. Through foreclosures, families downsizing and young people forgoing homeownership, the housing crisis has created a glut of empty homes.
For insurers, these vacant properties carry significant risks that differ in severity and frequency from those of an occupied home. But they also provide agents and brokers ample opportunities to build expertise and new business.
Millions of Empty Homes
The effects of the last decade’s housing crisis are well documented. The residential vacancy rate rose by an alarming 50 percent between 2000 and 2010. The U.S. Census Bureau reported that 13.9 percent of all housing units in the country are vacant, which means millions of homes are still unoccupied. California, Florida and Texas each have 1.2 million vacant properties, and many other states are close behind.
A house may be unoccupied for long periods of time for many reasons. These vacancies occur in any economic climate:
- A family has moved into their new home before their former home sells.
- During extensive home renovations, the occupants of a home decide to move out temporarily.
- The executor of a will is settling an estate and cannot find a family member to occupy the deceased’s home before it sells.
- An owner of seasonal properties does not occupy these homes for significant portions of the year.
In any of these cases, a property may stand vacant—or completely unattended—for weeks, months or even years. Unfortunately, many property owners do not realize that this arrangement puts their properties and finances in danger.
Standard Homeowners Insurance Doesn’t Cut It
We see it every day, whether in our neighborhoods, along our commute route or in a friend’s neighborhood: A property left unattended quickly becomes overgrown, dangerous, an eyesore and an easy target. Vandals, thieves and squatters (not to mention rodents and pests) take advantage of neglect and do their worst. The damage is often expensive and may not be covered by a standard home insurance policy.
Vacant properties pose other substantial risks. Problems that are relatively common and manageable in an occupied home can turn into more serious problems when they go unnoticed, such as broken washer hoses or burst pipes. When left for days, weeks or longer, they can result in serious water damage to both real and personal property.
The same is true with fires. A fire in an occupied home has a fighting chance of being controlled, but a fire in a vacant home is far more likely to become a total loss.
Insurers consider vacant homes more risky. Some insurers cancel homeowner’s insurance policies (HO-3) after a home is unoccupied for 60 days. At the very least, an insurer may refuse to cover claims for damages incurred in a vacant home or rental unit. Though house sitters offer a solution by keeping a home occupied, this becomes less practical with long-term or frequent vacancies, as in the case of a rental unit. Additionally, some homeowner insurance policies stipulate that the named insured must occupy the premises for the policy to be valid. Simply put, homeowner’s insurance policies are based on the assumption that someone responsible will be around to call the police, plumber or contractor shortly after an incident of vandalism or property damage occurs.
Vacant Property Insurance for Homeowners
That’s where vacant property insurance—and a savvy agent—comes in. Several different vacant property solutions are available, typically based on a DP-1 form. HO-3 policies often are called "all-risk" policies, because they cover all risks and perils unless otherwise specified in the policy. On the other hand, a DP-1 program functions on a named peril list, meaning it will only cover risks enumerated in the policy.
Furthermore, personal liability is a standard feature in many HO-3 policies, but not in vacant policies. Instead, vacant policy may include premises liability to cover injury or property damage to a third party—and this may only be available as an endorsement. Similarly, personal property typically is covered in homeowner’s insurance policies, but not in vacant property policies.
Consider optional coverage or endorsements, such as vandalism and malicious mischief, builders’ risk and burglary. Vacant property policies often have more flexible policy terms, meaning most are available as 3-, 6- or 12-month policies.
Because homeowner vacancy risks vary widely, no one solution can be prescribed for all situations. Here are some common scenarios:
- If a family has moved before selling their former house, you can write the policy on a Dwelling DP-1 form, with the "Vacant" option selected in the occupancy and product boxes. If the owners have left any valuable personal belongings to stage the home for potential buyers, offer a burglary endorsement or a Coverage C personal property endorsement. Additionally, vandalism and malicious mischief coverage (VM&M) can be helpful.
- What if homeowners decide to move out temporarily during extensive home renovations? Write the same policy as above, but encourage the homeowner to purchase a builders’ risk endorsement. This will cover the value of improvements, alterations or repairs during a renovation, as well as up to $5,000 coverage for temporary structures, scaffolding and construction forms. This would be another good fit for VM&M coverage.
- If you are handling insurance for a condominium and it becomes vacant, you will want to write it as a Dwelling DP-1 Vacant Condo policy. Contents do not need to be removed (they can purchase personal property coverage) and $1,000 for loss assessment is included. Coverage A does not include the building structure or land, only "walls" in coverage. Refer to the condo association’s master policy to determine an adequate coverage limit for the insured’s policy and to understand any insurance requirements.
Each scenario requires a different approach, but by working with a vacant property specialist, you can make sure your clients get the coverage they need.
Vacant Property Insurance for Rentals
Rentals are more likely to stand vacant than other homes. According to the Census Bureau, rental vacancy rates are usually five to six percentage points higher than homeowner vacancy rates. If an insurer discovers that a landlord depends on a standard dwelling policy (DP-3) for a vacant rental, the insurer may reduce coverage or deny a claim, requiring the landlord to cover large costs out of pocket.
A good solution is a Vacancy Permission endorsement. This endorsement is added to a DP-3 policy or a DP-1 policy when a home becomes vacant. Then it is removed when the property is occupied, without policy cancellations and rewrites. More importantly, it protects rental properties from the financial effects of vandalism and burglary during vulnerable vacancy gaps.
Premiums may rise slightly with a Vacancy Permission endorsement, but it saves rental property owners from footing the bill for large claims. For agents, these endorsements are a more consistent source of income than short-term vacant property policies.
Carve Out a Vacant Property Niche
Those short-term vacant property policies have their own financial benefits for agents. Such policies often have a higher premium than the average homeowner’s insurance or dwelling policy, which means higher commissions.
Becoming a local vacant property expert offers many benefits for agents willing to put in time and energy toward a long-term goal. Not many standard carriers are willing to write vacant property programs, so you will need to find specialty carriers with the underwriting acumen and claims expertise to handle this risk.
Because the vacant home insurance market is a niche, it does have its own unique risks and rewards. First, agents should understand that this market is an "open secret"—other agents in your area work in this space. Furthermore, it should fit with your current book of business. Rather than becoming a significant burden or haphazard add-on, this market should allow you to create a consistent pipeline of revenue for yourself and a seamless experience for clients.
If you decide to pursue the vacant property insurance market, networking may provide the boost you need. Though networking requires patience, the time and energy you invest in building connections in your community leads to a secure future of referrals and new clients. Begin by joining a local business networking group and sharing your knowledge with the group. Get involved with your local chamber of commerce or small business association, and be an active participant.
Seek to connect with real estate agents, financial advisors, investors and lenders. All have insight into vacant property markets. Real estate agents and lenders know what homes are languishing on the market, while financial advisors and investors have insight into the rental market. All can benefit from the expertise of a local insurance agent or broker who ensures that vacant homes are properly insured.
In networking, be sure to give as much as you receive. As an agent, you have a valuable perspective on a topic that many business owners find needlessly complex. If you participate in groups, offer insurance tips and give expert advice, you’ll gain the trust of your neighbor businesses. This trust will produce the results you seek, nourishing your agency over the long-term.