Pretty vacant: Cashing in a development trend

This specialty evolved in part because of our location in a gentrifying section of Baltimore, where many people are buying older homes and fixing them up. Our clients run the gamut from developers, individual homeowners, banks and mortgage holders for repossessed properties.

In spite of the current mortgage crisis and a tough economy–or maybe because of it–the need for this coverage hasn't dropped off. A poor economy means people who bought properties when things were good aren't able to renovate them as quickly as before, leaving buildings sitting vacant and at risk–sometimes for as long as two or three years if the owner hasn't resold the property or pulled the trigger to do the renovation.

Best of all, writing vacant building coverage opens doors to cross selling. We'll write coverage on the vacant land, then find out if there's a building going up, which means we can write builders risk. Finally, when the project is complete, we can write the standard property coverage. This overlap really lets us put our foot in the door with a policyholder.

For example, we're currently writing a vacant property policy on a commercial site right across from our Fallston office that is being turned into a used car dealership–another one of our specialty businesses. We wrote the policy while the property was being renovated, added the vacant property endorsement, and we've already written the commercial coverage with Erie for when the construction is completed; we'll just take off the renovation endorsement when it's done.

Because insurance is a relationship business, word gets out about how our agency has made a specialty out of this business. A few of our producers who specialize in vacant property seem to have a following, and it's mostly because of them that we're getting new business. Even though we don't do a dime's worth of advertising for the business, real estate agents, mortgage people and property owners in the area are spreading the word.

Because we're an independent agency, we have the markets to write this coverage. The soft market means there are plenty of standard and E&S carriers with an appetite for this business. We deal with wholesalers in the E&S market and work directly with companies including Foremost, Tapco and Atlantic Specialty. We even get direct solicitations from companies like Interstate who have an appetite for this market right now.

A lot of the coverage we place is for buildings being rehabbed that are between owners. In these cases, the current owner gets a special form policy that covers fire, and we always add vandalism and malicious mischief–an extra cost to the buyer, but a smart investment since this type of loss happens all the time.

Coverage is typically written on standard ISO policies, and because our agency does a lot of business with Erie Insurance, we'll write some vacant property coverage on their paper as well. For example, if a commercial building being rehabbed, we'll write the vacant property coverage with Erie so when the work is finished, we can write the regular property coverage with Erie, too. On the other hand, if we're writing coverage after the home is renovated, we might select Foremost because they do a lot of personal property coverage.

Vacant property coverage is still expensive compared with regular homeowners coverage. For example, vacant property coverage including vandalism and malicious mischief for a $249,000 dwelling in northern Maryland will run $3,781, with $1,000 deductible, $300,000 in liability coverage and $10,000 in medical payments. A vacant brick row house in Baltimore city valued at $105,000, for $300,000 in coverage will run $1,254 in premium. While this may seem expensive, the cost would undoubtedly be higher with limited markets.

One contentious issue in writing coverage can be cancellation provisions. These can be harsh: for example, if a property's bank mortgage holder requires a one-year vacant property policy and the project is done in six months, some insurers penalize the buyer if they cancel the policy, especially if it's E&S coverage. The buyer may end up getting nothing back, although standard insurers sometimes give back a pro-rated portion, or pro-rated minus 10 percent. This is something we consider when determining which insurer to place coverage with.

Because we know vacant property coverage, we can place business quickly and correctly–which means if there's a claim, our customers get claims settlements quickly, too. This business involves asking the customer a lot of questions and making sure we're doing it the right way–something we're very concerned about to avoid E&O claims since we don't use program administrators for the business, we're doing it on our own.

We've seen our share of claims, including a fire that broke out in the property next door to the insured, and a liability claim when a real estate agent fell while showing the property. Our insurers schedule loss control to go through the sites and if the insurer sees something that could be a problem, they inform the insured what to fix on the site to prevent losses. For example, owners can make sure the site isn't an attractive nuisance by putting up signs and fencing or–if the project is on hold–boarding it up.

We also request building values from the insurer, not only to lessen the potential for a claim, but to get a more accurate assessment than what we typically get from the bank, which sometimes want excessive, overinsured coverage.

To protect ourselves from E&O, we always make sure we offer our customers liability. Lots of buyers are cost conscious, but if something goes wrong, they'll point the finger at us. To prevent problems, we always sell vacant property with liability, vandalism and malicious mischief.

Vacant property coverage is a "honey hole" we've found through word of mouth and relationships with our producers and developers, mortgage brokers, and in many cases, our existing personal lines customers. Our success truly proves the value of an independent insurance agent and provides an opportunity to shine because we have the markets and the expertise to walk a buyer through the whole process–a real win-win for both us and the customer.