Many of the physicians we deal with have investment real-estate including residential and/or commercial properties. Unfortunately, many physicians make the wrong assumptions when it comes to the homeowners or commercial property and casualty insurance policies they bought.
We are always on the lookout for both obvious and hidden exposures that can jeopardize those we protect. This week we share information on an exposure that is increasingly common in the current real estate and litigation environment.
Vacant Property Liability
Many of the physicians we deal with have investment real estate including residential and/or commercial properties. Many of the tenants of these properties have vacated the premises as their own financial situations have ebbed and flowed with the economy leaving both rental homes and condos and commercial buildings empty for extended periods of time.
Unfortunately, many physicians wrongly assume that the homeowners or commercial property and casualty insurance policies they bought while the properties were occupied still apply to the vacant properties as long as premiums continued to be paid. They don’t.
Insurance companies determine premiums based on a number of factors including the location, value, size, and usage of a piece of property. Most of those policies assume that premises are occupied and have specific language that voids coverage immediately when the carrier is informed of a vacancy of as few as 60 contiguous days. Even if the policy is not explicitly rendered void by vacancy the occupancy status of any particular property is considered “material” to the insurance company.
Property owners with material changes to usage or occupancy may discover that those changes are not covered under the terms of their insurance policy or reduce their coverage by a specific percentage. Under some policies even partially vacant buildings with less than thirty-one percent occupancy can have coverage reduced by 15 percent according to Geri Custer, president of Geri Custer Insurance in Phoenix.
How Bad Could it be?
Very, very bad. If the policy itself is cancelled or declared void by vacancy in the policy limits and exclusions the loss could be as much as the entire value of the property in the case of a flood, vandalism, fire or other catastrophic damage.
Sometimes this damage has internal origins, as in cases where automatic fire protection sprinkler systems, general plumbing, heating, air conditioning, or a household appliance fail as we see caused by freezing if a structure has insufficient heat or if the water system has not been shut off and drained. Imagine a burst pipe on the third level of a commercial building that goes undiscovered for 48 hours and the damage it could do and you will get an idea of the exposure.
More commonly, expensive damage due to vandalism and theft are serious exposures. One of our clients recently found that his vacant commercial property had been gutted by thieves who stole all the copper wire in the building, tearing up walls, floors and ceilings, as well as plumbing fixtures, appliances and even the air-conditioning compressor. The building was spotless and the damage undetectable from the outside during his “drive-bys”.
As covered in my last article, the property owner is also still responsible for “premises liability,” meaning any injuries, accidents, losses, or economic damages incurred on the property. This can be true even in the case of trespassers including squatters and even the local teenagers that enjoy using your railings and planters as an impromptu skateboard park.
The key here is proactive knowledge. Know and understand the limits of your policy and what your responsibility is in terms of notice to the insurance company. Remember that in most cases as few as 60 days of continuous vacancy may void or reduce your coverage and simply notify the carrier if that event seems imminent so you can buy the sort term gap coverage you need to get you through the vacancy safely. No matter what the premium increase amounts to it is nearly guaranteed to be less than the cost (and stress!) of a loss or lawsuit. Finally, make sure that you are holding the property the right way, not in your own name, and be a hard target before any exposure occurs.
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