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

“Once you have a vacant building, the owners need to notify their broker so we can place a vacancy permit with their current carrier. Or [if the carrier decides to cancel coverage] we can go to a surplus-lines carrier and get a vacancy 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's existing Commercial Liability policy, this will negate the vacancy loss provisions in the standard form, says Chris A. Zoidis, vice president of the Special Risk Division at Burns & Wilcox.

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

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

Most commercial owners don't understand how a building's occupancy status can change their exposures, and so they must rely on their retail agent to educate them up front about the possibility.

“I think a large number of owners or even the person wearing the risk-manager hat may not fully understand what the vacancy restrictions are in their policy,” says Mark DeLawter, real estate practice leader at Zurich North America Commercial. “We're seeing so many risk managers wearing different hats within an organization that they're not up on it. In some cases, they're relying on an outside agent.”

Zurich, for its part, does not have vacancy restrictions on its Property form but will add them in at times, DeLawter says. “Most of our competitors have the vacancy restrictions built into their form. Our underwriters look into the risk, and if we feel we need to restrict coverage, we will.”

COPPER THEFT SPURS CLAIMS

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

Copper prices have skyrocketed in recent years, along with general vandalism claims, as thieves target these abandoned buildings for copper wiring and pipes. Big losses have not been for the valuable metal itself but for the damages done to the building to get to it.

With one client, thieves “went into the building and for 24 hours ripped every piece of copper wiring and piping out of the wall,” 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 copper plumbing from a building with an active water supply. The water ran throughout the building for three days before anyone found it, Little says.

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

CREATIVE OCCUPANCIES REDUCE VACANCIES

While the insurance market for Vacant Buildings coverage has been hot since the Great Recession began in earnest, it is beginning to cool somewhat. 

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

“More people are starting to refocus the property. It may have been an old industrial-manufacturing facility, and now you have a new tenant come in,” says Shearman.

These days, he explains, more insurers are willing to accommodate commercial-building owners who can create new uses for their unused space by subdividing or completely changing the usage.

By subdividing, these owners are taking a space designed, say, for warehousing and using it for an entirely different class of tenant—such as an indoor mall—or dividing up the space for smaller retail outlets or manufacturers.

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

For example, an insurer would be more concerned when a building is designated for one type of manufacturing and the owner brings in something that's more hazardous, where the existing insurance protection would be inadequate.

BIG, BEAUTIFUL…AND EMPTY

One of the most notable trends in the insuring of vacant buildings 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, construction spending on commercial real estate rose more than 12 percent over 2010, to $92.3 billion, according to a report published in May of this year by the National Association of Industrial and Office Properties Research Foundation.

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

The problem is renting some of those new structures has been a challenge for property owners, who find themselves stuck with empty offices.

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

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

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