When many insurance practitioners first learn about vacancy, they are taught,
in general terms, the difference between unoccupied and vacant. An unoccupied building
has property inside, but no people are occupying the building. A vacant building has
neither property inside nor occupants. Using these general descriptions, though, and
applying them to most commercial property insurance lead to a mistaken impression of
what vacancy means and how vacancy affects coverage.
Sample Language—The ISO Form
Consider the Insurance Services Office, Inc. (ISO), Building and
Personal Property Coverage Form (CP 00 10 10 12): The term "unoccupied" does not
appear in the form. While this is not true of all coverage forms, it is true of
many. "Vacancy" is described in the Vacancy Loss Condition as follows:
(1) As used in this Vacancy Condition, the term building and the term vacant have the meanings set forth in (1)(a) and (1)(b) below:
(a) When this policy is issued to a tenant, and with respect to that tenant's interest in Covered Property, building means the unit or suite rented or leased to the tenant. Such building is vacant when it does not contain enough business personal property to conduct customary operations.
(b) When this policy is issued to the owner or general lessee of a building, building 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.
(2) Buildings under construction or renovation are not considered vacant.
Under the Building and Personal Property Coverage Form, if the
building has been vacant for more than 60 consecutive days before the loss or damage
occurs, no coverage applies for loss or damage by the following perils.
(a) Vandalism
(b) Sprinkler leakage, unless you have protected the system against freezing
(c) Building glass breakage
(d) Water damage
(e) Theft
(f) Attempted theft
Payment for damage by any other covered cause of loss is reduced
by 15 percent.
So what exactly does it mean to be vacant, using this language?
The Tenant's Policy
When the named insured is the tenant, the "building" means the unit or suite leased to the tenant. If it does not contain enough business personal property to conduct customary operations, the building is considered to be vacant.
Consider a saltwater taffy shop in a rented storefront on the
boardwalk in a New Jersey beach town. The shop shuts down between October and
May. The insured has an annual lease and leaves in place trade fixtures and other
business personal property items. In October, the remaining inventory is sold, and
all ingredients are removed from the premises. The insured does not have enough
business personal property to conduct customary operations, and the property is
considered vacant. It is unlikely, though, that the insured considers itself vacant.
The Building Owner's Policy
While the "vacancy" definition for a tenant focuses on the property in the building, the "vacancy" definition for the building owner focuses on the activity in the building. When the named insured is the owner or general lessee of the building, 31 percent of the total square footage must be rented and used by a lessee to conduct customary operations or be used by the building owner to conduct customary operations. If that is not the case, the building is vacant.
The following are a few important points that building owners
should consider.
31 percent applies to the total square footage of the building, not simply to the rentable area or the area used to conduct customary operations. Common areas, for example, must be considered.
For lessors' risk exposures, 31 percent of the building must be rented and used by the lessee to conduct customary
operations. Simply having a lease in place is not enough.
Be careful not to assume that an insurer and/or court will agree
that a building is being used to conduct customary operations. Consider the New York
case, Keren Habinyon Hachudosh
D'Rabeinu Yoel of Satmar BP v. Philadelphia Indem. Ins. Co., 462 F.
App'x 70 (2d Cir. 2012). There, the named insured operated a school and covered 11
school buildings on a commercial property policy with ISO vacancy language. In 2006,
the insured stopped using one of the buildings as a school, turned off the
electricity and gas, and began to store school supplies, furniture, and computers in
the building. The building was damaged by vandals in October 2007. The only activity
in the building within 60 days of the date of loss was one day when 25 teachers had
a meeting in the main room while students ate lunch in the dining room and played on
the roof. The trial court ruled that the building was vacant, and the appellate
court affirmed, stating as follows:
[T]he term "customary operations" can only refer to the commonly practiced
activity of operating a school … this one-day event is insufficient to defeat
the application of the policy exclusion in this case because it is undisputed
that the defining element of the operation of a school, the instruction of
students, did not take place on that day.
Construction or Renovation
Buildings under construction or renovation are not considered vacant, but "construction" and "renovation" are not defined terms. What do these terms mean, and how do construction or renovation projects differ, for example, from remodeling or repair projects? Not surprisingly, courts reach different conclusions.
Coverage Applies
In Farbman Group v.
Travelers Ins. Co., No. 03-74975 (E.D. Mich. Sep. 28, 2006),
water from a burst pipe damaged a building that was usually rented to others;
the tenants had moved out several months before the loss. The definition of
"vacant," while different from ISO's, stated that buildings under construction
or renovation are not considered vacant. In this policy, once the building was
vacant for more than 60 consecutive days, no coverage for water damage applied.
Within 60 days of the loss, an enclosed walkway that connected the insured
building to an adjacent property was being demolished. The walkway was
originally built by one of the tenants to connect the building to another
building occupied by the same tenant. The tenant was required by the lease to
restore the property to its previous condition, which involved removing the
enclosed walkway and restoring the original façade of the building. The
insurer's position was that coverage did not apply because the building had been
vacant for more than 60 days. The insurer stated as follows:
[A]ny work on the exterior of the building which did not render the building
uninhabitable to tenants or endanger or affect the overall structure of the
building is not sufficient to constitute construction or renovation as
contemplated by the policy.
The court reviewed several dictionary definitions of "renovation," one of
which was "[t]o renew materially; to repair; to restore by replacing lost or
damaged parts; to create anew." It concluded that the building was not vacant at
the time of loss because the work being done constituted renovation work.
Coverage, therefore, applied.
Coverage Does Not Apply
In Suder-Benore Co. v. Motorists Mut. Ins. Co., 995 N.E.2d 1279
(Ohio App. 2013), the named insured owned a shopping center and insured it under
a commercial property policy containing ISO's vacancy language. The main tenant,
a Food Town grocery store, vacated the building between 1 and 2 years before
vandals entered the space, damaging parts of the building and stealing copper
pipe. At the time of the break-in, only 16 percent of the building was rented
and occupied.
The insured argued that the vacancy condition should not apply
because the building was being renovated. Less than 60 days before the break-in,
the insured, acting on a mandate from the fire inspector, brought in a
contractor to repair and reactivate the sprinkler system; workers came to the
site on 3 separate days. While the trial court ruled this work constituted
"renovation," the appellate court reversed the decision, ruling as follows:
[The insured] did not perform the work to the vacant Food
Town building to prepare it to be leased or even to be useable.… Merely
reactivating a sprinkler system is simply not consistent with the commonly
understood meaning of "renovation."
In another Ohio case, Martin Belich v. Westfield Ins.
Co., 00-LW-6065, 99-L-163 (Ohio App. Dec 29, 2000), the court
addressed the question of whether preparing to renovate was enough to keep a
property from being considered vacant. The named insured rented a building to a
tenant who planned to operate a sports bar; the lease began on March 15, 1998,
but the tenant had access to the building beginning on January 1, 1998. The
building was insured under a commercial property policy with ISO vacancy
language.
On May 21, 1998, extensive water damage was discovered after a
shower had been left running. At the time of the water loss, the city had not
issued approval to remodel the building. The tenant claimed he had begun the
renovation project by "hiring an architect; cleaning; hiring his son to manage
the project; obtaining government approval; and removing a stage and coat racks
[from the previous party center tenant]." He testified that he was in the
building every 2 weeks.
The court stated as follows:
Renovation contemplates something being done at the
building, not merely planning to renovate, remodel, or refurbish. However,
the way the policy is written, even one day of renovation done within the
previous sixty days would be sufficient to overcome the vacancy clause. The
removal of a stage and some coat racks would be sufficient to constitute
renovation.
Note that, because there was no testimony or evidence about
when the stage and coat racks were removed, the court ruled that the vacancy
condition applied, and there was no coverage for the loss.
The Perils—Vandalism Versus Fire
Once it has been established that a building is or is not vacant for more than 60 consecutive days, one turns to the perils. In the best-case scenario, using ISO language, payment for damage to the vacant building will be reduced by 15 percent. For certain named causes of loss, however, there is no coverage. Consider vandalism and fire, for example. If vandals damage a vacant building, there is no coverage. If fire damages a vacant building, payment is reduced by 15 percent. What if the vandals set fire to the building, though? Is arson considered a vandalism loss or a fire loss? Once again, courts disagree.
Vandalism Does Not Include Arson
This question was explored in a 2024 case in Illinois, Abudayya v. Country Mut. Ins.
Co., No. 2023-LA-10 (Ill. Cir Ct. Oct. 1, 2024). In that case,
the named insured purchased a commercial property policy that included vacancy
language similar to ISO's. The building was vacant for over 6 months before an
unknown arsonist damaged it. The insurer denied the claim as a loss caused by
vandalism, which is a peril excluded for buildings vacant for more than 60
consecutive days.
The court ruled that the undefined term "vandalism," for purposes of the vacancy exclusion, was "ambiguous as to whether intentionally set fires fall under the umbrella of fire or vandalism" and ruled in favor of the insured.
By failing to define vandalism as specifically including intentionally set
fires, Country Mutual left open the opportunity for the term to be
interpreted as excluding such fires because they also reasonably fall under
the umbrella of "other causes of loss."
Such language distinguishing between vandalism and arson does appear in some
insurer proprietary forms. The following is an example of such exclusionary
language.
Vandalism or loss caused by fire resulting from vandalism, if the insured
dwelling was vacant or unoccupied for more than 90 consecutive days
immediately prior to the vandalism.
Vandalism Includes Arson
In a Florida case involving arson, Botee v. Southern Fid. Ins.
Co., 162 So. 3d 183 (Fla. Dist. Ct. App. 2015), the court turned
to the dictionary, finding as follows:
Webster's defines
vandalism as "willful or malicious destruction or defacement of public or
private property." Arson is the "willful or malicious burning of property
(as a building) esp. with criminal or fraudulent intent."
It ruled that the plain and ordinary meaning of "vandalism" encompasses arson. As such, coverage did not apply as the damaged building was vacant.
Helping the Insured with Vacancy
Vacancy conditions are problematic for building owners and tenants alike. There are a few things insurance professionals can do to help their clients.
Make sure the vacancy conditions in the proposed policy are clearly
communicated to the client. While many insurers use ISO forms or model their
vacancy conditions on ISO policy language, policy language should always be
carefully reviewed. Here are just a few examples of more restrictive language
from insurer forms.
"Unless otherwise provided in writing added hereto,
this Company shall not be liable for loss occurring while a described
building, whether intended for occupancy by owner or tenant, is vacant
or unoccupied beyond a period of 60 consecutive days."
"A property is vacant when 90 percent or more of the
square footage of the entire building is not rented or is not used to
conduct customary operations."
Recommend that the client make the agent or insurer aware of any changes in occupancy or operations throughout the policy year. It is easy for a client to slip into a condition of vacancy without realizing they have a coverage problem.
Be careful when insureds move into a new premises. It is often the case that
renovation work will be done, but it doesn't typically start immediately. Ask
about the timeline of the work. As was seen in the second Ohio case above,
preparing to renovate is not the same as renovating.
If the insured property is vacant, explore endorsements to enhance coverage.
Many insurers are reluctant to insure a vacant building, but there are certain
circumstances where it may make sense to do so. ISO has two endorsements that
can be helpful.
Vacancy Permit (CP 04
50 07 88) allows the vacancy loss condition to be suspended for
the permit period shown on the endorsement. This can be especially
helpful for seasonal businesses. Note that the insurer still has the
option to specifically exclude vandalism and sprinkler leakage
losses.
Vacancy Changes (CP 04
60 10 12) allows the minimum rented/used percentage of 31
percent to be replaced with a lower percentage shown on the
endorsement.
If an insurer is unwilling to provide the coverage needed for a vacant
building, explore coverage under a policy specifically designed to cover vacant
buildings. These policies are typically written in the nonadmitted market, and
care should be taken to carefully review the coverage terms and conditions.
Conclusion
Most insurers consider vacant buildings to be an increased hazard
and take steps to limit their exposure, and most insureds do not understand what it
means to be vacant and how vacancy can impact coverage. Adding to the uncertainty is
that courts decide questions about vacancy differently. It is important that the
vacancy condition in any policy be understood by the insurance agent and insured,
that the insurer be informed of any changes in exposure, and that appropriate
options to cover vacant buildings be explored.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.
When many insurance practitioners first learn about vacancy, they are taught, in general terms, the difference between unoccupied and vacant. An unoccupied building has property inside, but no people are occupying the building. A vacant building has neither property inside nor occupants. Using these general descriptions, though, and applying them to most commercial property insurance lead to a mistaken impression of what vacancy means and how vacancy affects coverage.
Sample Language—The ISO Form
Consider the Insurance Services Office, Inc. (ISO), Building and Personal Property Coverage Form (CP 00 10 10 12): The term "unoccupied" does not appear in the form. While this is not true of all coverage forms, it is true of many. "Vacancy" is described in the Vacancy Loss Condition as follows:
Under the Building and Personal Property Coverage Form, if the building has been vacant for more than 60 consecutive days before the loss or damage occurs, no coverage applies for loss or damage by the following perils.
Payment for damage by any other covered cause of loss is reduced by 15 percent.
So what exactly does it mean to be vacant, using this language?
The Tenant's Policy
When the named insured is the tenant, the "building" means the unit or suite leased to the tenant. If it does not contain enough business personal property to conduct customary operations, the building is considered to be vacant.
Consider a saltwater taffy shop in a rented storefront on the boardwalk in a New Jersey beach town. The shop shuts down between October and May. The insured has an annual lease and leaves in place trade fixtures and other business personal property items. In October, the remaining inventory is sold, and all ingredients are removed from the premises. The insured does not have enough business personal property to conduct customary operations, and the property is considered vacant. It is unlikely, though, that the insured considers itself vacant.
The Building Owner's Policy
While the "vacancy" definition for a tenant focuses on the property in the building, the "vacancy" definition for the building owner focuses on the activity in the building. When the named insured is the owner or general lessee of the building, 31 percent of the total square footage must be rented and used by a lessee to conduct customary operations or be used by the building owner to conduct customary operations. If that is not the case, the building is vacant.
The following are a few important points that building owners should consider.
Be careful not to assume that an insurer and/or court will agree that a building is being used to conduct customary operations. Consider the New York case, Keren Habinyon Hachudosh D'Rabeinu Yoel of Satmar BP v. Philadelphia Indem. Ins. Co., 462 F. App'x 70 (2d Cir. 2012). There, the named insured operated a school and covered 11 school buildings on a commercial property policy with ISO vacancy language. In 2006, the insured stopped using one of the buildings as a school, turned off the electricity and gas, and began to store school supplies, furniture, and computers in the building. The building was damaged by vandals in October 2007. The only activity in the building within 60 days of the date of loss was one day when 25 teachers had a meeting in the main room while students ate lunch in the dining room and played on the roof. The trial court ruled that the building was vacant, and the appellate court affirmed, stating as follows:
Construction or Renovation
Buildings under construction or renovation are not considered vacant, but "construction" and "renovation" are not defined terms. What do these terms mean, and how do construction or renovation projects differ, for example, from remodeling or repair projects? Not surprisingly, courts reach different conclusions.
Coverage Applies
In Farbman Group v. Travelers Ins. Co., No. 03-74975 (E.D. Mich. Sep. 28, 2006), water from a burst pipe damaged a building that was usually rented to others; the tenants had moved out several months before the loss. The definition of "vacant," while different from ISO's, stated that buildings under construction or renovation are not considered vacant. In this policy, once the building was vacant for more than 60 consecutive days, no coverage for water damage applied.
Within 60 days of the loss, an enclosed walkway that connected the insured building to an adjacent property was being demolished. The walkway was originally built by one of the tenants to connect the building to another building occupied by the same tenant. The tenant was required by the lease to restore the property to its previous condition, which involved removing the enclosed walkway and restoring the original façade of the building. The insurer's position was that coverage did not apply because the building had been vacant for more than 60 days. The insurer stated as follows:
The court reviewed several dictionary definitions of "renovation," one of which was "[t]o renew materially; to repair; to restore by replacing lost or damaged parts; to create anew." It concluded that the building was not vacant at the time of loss because the work being done constituted renovation work. Coverage, therefore, applied.
Coverage Does Not Apply
In Suder-Benore Co. v. Motorists Mut. Ins. Co., 995 N.E.2d 1279 (Ohio App. 2013), the named insured owned a shopping center and insured it under a commercial property policy containing ISO's vacancy language. The main tenant, a Food Town grocery store, vacated the building between 1 and 2 years before vandals entered the space, damaging parts of the building and stealing copper pipe. At the time of the break-in, only 16 percent of the building was rented and occupied.
The insured argued that the vacancy condition should not apply because the building was being renovated. Less than 60 days before the break-in, the insured, acting on a mandate from the fire inspector, brought in a contractor to repair and reactivate the sprinkler system; workers came to the site on 3 separate days. While the trial court ruled this work constituted "renovation," the appellate court reversed the decision, ruling as follows:
In another Ohio case, Martin Belich v. Westfield Ins. Co., 00-LW-6065, 99-L-163 (Ohio App. Dec 29, 2000), the court addressed the question of whether preparing to renovate was enough to keep a property from being considered vacant. The named insured rented a building to a tenant who planned to operate a sports bar; the lease began on March 15, 1998, but the tenant had access to the building beginning on January 1, 1998. The building was insured under a commercial property policy with ISO vacancy language.
On May 21, 1998, extensive water damage was discovered after a shower had been left running. At the time of the water loss, the city had not issued approval to remodel the building. The tenant claimed he had begun the renovation project by "hiring an architect; cleaning; hiring his son to manage the project; obtaining government approval; and removing a stage and coat racks [from the previous party center tenant]." He testified that he was in the building every 2 weeks.
The court stated as follows:
Note that, because there was no testimony or evidence about when the stage and coat racks were removed, the court ruled that the vacancy condition applied, and there was no coverage for the loss.
The Perils—Vandalism Versus Fire
Once it has been established that a building is or is not vacant for more than 60 consecutive days, one turns to the perils. In the best-case scenario, using ISO language, payment for damage to the vacant building will be reduced by 15 percent. For certain named causes of loss, however, there is no coverage. Consider vandalism and fire, for example. If vandals damage a vacant building, there is no coverage. If fire damages a vacant building, payment is reduced by 15 percent. What if the vandals set fire to the building, though? Is arson considered a vandalism loss or a fire loss? Once again, courts disagree.
Vandalism Does Not Include Arson
This question was explored in a 2024 case in Illinois, Abudayya v. Country Mut. Ins. Co., No. 2023-LA-10 (Ill. Cir Ct. Oct. 1, 2024). In that case, the named insured purchased a commercial property policy that included vacancy language similar to ISO's. The building was vacant for over 6 months before an unknown arsonist damaged it. The insurer denied the claim as a loss caused by vandalism, which is a peril excluded for buildings vacant for more than 60 consecutive days.
The court ruled that the undefined term "vandalism," for purposes of the vacancy exclusion, was "ambiguous as to whether intentionally set fires fall under the umbrella of fire or vandalism" and ruled in favor of the insured.
Such language distinguishing between vandalism and arson does appear in some insurer proprietary forms. The following is an example of such exclusionary language.
Vandalism Includes Arson
In a Florida case involving arson, Botee v. Southern Fid. Ins. Co., 162 So. 3d 183 (Fla. Dist. Ct. App. 2015), the court turned to the dictionary, finding as follows:
It ruled that the plain and ordinary meaning of "vandalism" encompasses arson. As such, coverage did not apply as the damaged building was vacant.
Helping the Insured with Vacancy
Vacancy conditions are problematic for building owners and tenants alike. There are a few things insurance professionals can do to help their clients.
Conclusion
Most insurers consider vacant buildings to be an increased hazard and take steps to limit their exposure, and most insureds do not understand what it means to be vacant and how vacancy can impact coverage. Adding to the uncertainty is that courts decide questions about vacancy differently. It is important that the vacancy condition in any policy be understood by the insurance agent and insured, that the insurer be informed of any changes in exposure, and that appropriate options to cover vacant buildings be explored.
Opinions expressed in Expert Commentary articles are those of the author and are not necessarily held by the author's employer or IRMI. Expert Commentary articles and other IRMI Online content do not purport to provide legal, accounting, or other professional advice or opinion. If such advice is needed, consult with your attorney, accountant, or other qualified adviser.