EXTENDED “VACANCIES” / EXTENDED “UNOCCUPANCIES”
THE IMPLICATION OF THE “VACANCY” EXCLUSIONS IN PROPERTY INSURANCE
DURING THE COVID-19 PANDEMIC
This article is intended to provide the reader a basic understanding of the issues that residential or commercial property owners face when their home, apartment complex, or commercial building is considered “vacant” or “unoccupied” due to an extended “vacancy” or an extended “unoccupancy”.
During these unprecedented times, it is imperative for property owners to review and understand their property insurance policy because many Tenants are unable to continue their tenancy or operate their business during the COVID-19 pandemic.
What happens to insurance coverages when a residential or commercial property becomes “vacant” or “unoccupied”?
This is an important question to answer because many insurance policies will deny coverage if there is an extended vacancy or unoccupancy. When a commercial or residential property becomes vacant or unoccupied, property owners assume their existing insurance policy will provide coverage for a loss occurring during the vacancy or unoccupancy. Unfortunately, many property insurance policies will not cover claims during an extended vacancy because most insurance policies exclude coverage for “vacant” or “unoccupied” property after a specified number of days (as defined by the insurance policy). Consequently, there is a monetary risk to the property owner / landlord if: (a) a loss occurs during a period of extended “vacancy” or extended “lack of occupancy”; and, (b) if it is determined there is no insurance coverage.
This article is not intended to give the reader legal advice on whether their property insurance policy will cover claims arising when their property is “vacant” or “unoccupied.” Rather, this article is intended to provide an overview of how property insurance policies define “vacant” and “unoccupied” and MAY result in an excluded coverage determination for damages occurring at the time the property is “vacant” or “unoccupied”.
Depending upon the language of the specific insurance policy and how “vacant” and “unoccupied” are defined will determine if an insured will have insurance during an extended “vacancy”.
THE DISTINCTION BETWEEN “VACANT” AND “UNOCCUPIED”
The distinction between “vacant” and “unoccupied” is essential because if your insurance carrier determines that the property was “vacant”, then the vacancy exclusion applies, and coverage may be denied after a specified vacancy period, such as 60, 90 or 120 days. On the other hand, if the property is “unoccupied” then normal coverage MAY remain in place if the insurance carrier is notified that the space is “unoccupied.” A review of the specific insurance policy is necessary as there is variation between the definition of “vacant” and “unoccupied”.
To illustrate, a residential property insurance policy may define a “vacant” home as the following:
- A “vacant” home is one where the dwelling is not furnished for normal habitation or the occupants have moved out with no intention to return.
On the other hand:
- An “unoccupied” home is one that has not been lived in for thirty consecutive days. Example: A homeowner traveled to a second home and was unable to return to their primary residence because of travel restrictions or illness – and the home is “unoccupied” for more than 30 days.
Depending on the insurance policy provision, some insurance policies require the homeowner to notify the carrier if the home is not occupied after a certain number of days. If the homeowner fails to notify the carrier, it may result in an insurer denying coverage for a claim. However, if the home is “unoccupied” and the insurance company is notified, specific damage such as vandalism or fire may still be a covered loss.
Whether the “unoccupied exclusion” contained in most homeowner insurance policies will affect a homeowner will depend on how “vacant” or “unoccupied” is defined in the applicable insurance policy. We urge our readers to understand their homeowner’s policy or their commercial building insurance policy and the “vacancy” time limitations in their specific insurance policy. It is not uncommon for an insurance carrier to have a 60 day or 90 day “vacancy” limitation in the insurance policy, at which point coverages may be reduced or eliminated.
The way insurance policies are written, the risks involved with a vacant or unoccupied home are different. It may be that if a home is not occupied, there is higher risk that property damage may occur from an insured peril such as fire, flood or theft. As such homeowner policies will contain what has been coined as the “vacancy exclusion” to allow an insurer to deny a claim if the house has not been unoccupied for more than a specific number of days defined by in the insurance policy. Property owners and landlords are commonly unaware that it may be possible to buy an “endorsement” or a special policy (with substantially higher premiums) to provide coverage during a period of “extended vacancy” or an “extended unoccupancy”. It is important for our readers to discuss with their insurance representative their insurance coverages. Do no assume that because of the “COVID-19 crises” that insurance carriers will be generous to provide insurance coverage for a catastrophic total building loss if the building is vacant or unoccupied for 90, 120, or 180 days.
“THE VACANCY EXCLUSION”
What does “vacant” mean for a residential or commercial insurance policy? First, the definition of how “vacant” is defined in an insurance policy for a “tenant” occupying a commercial property may be different than a “owner” occupying a commercial building.
To illustrate, an insurance policy may define “vacancy” as:
- “…(B) uilding means the entire building. Such building is vacant unless at least 31% of its total square footage is:
- (i) Rented to a lessee or sublessee and used by the lessee or sublessee to conduct its customary operations; and/or,
- (ii) Used by the building owner to conduct customary operations.
When the insured is a tenant, it is much easier to determine whether the definition of “vacancy” has been satisfied. The building would be considered “vacant” if (a) less than 31% of the square footage is leased and (b) used by the tenants to conduct customary operations.
To illustrate, if a tenant operates a restaurant occupying 50% of the square footage of the building. Due to COVID-19, the restaurant is forced to close. The restaurant maintains its equipment and furniture; however, the employees are not conducting business operations. Thus, the restaurant is leasing more than 31% of the square footage and conducting “customary operations.” Even though the restaurant is not being used. Lack of use does not necessarily mean “vacant”, just presently unoccupied. The vacancy limitation may not apply in the example.
On the other hand, if the insured is a landlord/owner, it may be an entirely different analysis. An example when the building may be considered “vacant”:
- “Vacant means that: (1) 70% or more of the rentable square footage of a building at an insured location is not being actively used by you or a tenant for its intended purpose; or (2) 70% of more of the total square footage of a building at an insured location is not being actively used by or a tenant for its intended purpose; or (3) a building at an insured location utilized by you to conduct your business does not contain enough business personal property to conduct your customary operations.”
This type of insurance policy is an activity-based qualifier. Therefore, if at least 70% of the building is not actively used, it may be defined as “vacant”. Given the pandemic and government-ordered closures, many buildings are not in active use. Taking our restaurant example from above, if 50% of the building is leased by the tenant who operates a restaurant, per the insurance policy, it may not be “in use.” Not being in active use may trigger the policy’s vacancy limitation and coverage MAY be denied.
If the property is considered “vacant”, then the insurance policy may exclude coverages for losses caused by vandalism, water damage, fire, theft, etc. Sometimes, the insurance policy does not specifically exclude all losses when the building is “vacant”. Some policies may provide for a specified loss reduction of 15%. That means if $10,000 of damage occurs, the policy may only cover $8,500 (less policy deductible).
California’s “shelter-in-place” orders may significantly impact residential or commercial use and property insurance coverages if the “vacancy exclusion” is triggered. Whether and how the vacancy limitation applies is, as has been demonstrated, a function of the insurance policy language. It is important for all insureds to review their insurance policy language to determine what is considered “vacant” in order to prevent loss of coverage, if there is an extended vacancy or an extended unoccupancy.
As noted previously, the foregoing article is intended to provide a general overview of the “vacancy exclusions” for residential and commercial properties that may be considered “vacant” or “unoccupied” for any reason, including “shelter-in-place” orders. If the reader of this article has specific issues requiring specific analysis of his / her residential or commercial insurance policy, the reader should seek out the advice of counsel.
Dennis Faoro is a partner at Last & Faoro specializing in Real Estate and Construction Law for over 30 years, assisting owners, property managers, developers, contractors and realtors in real estate and construction matters. He can be reached at 650-696-8350, or by email at [email protected]. This article is not intended to contain legal advice, is not intended to discuss or address any specific situation or problem and should not be relied on in making any legal decisions. If the reader has a specific legal question or needs legal advice, the reader should contact a qualified attorney.