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IRMI Update
Risk Management & Insurance Commentary, Tips, and Tactics
December 12, 2012 | Issue 284 | ISSN: 1530-7948

Risk Tip
Closely Examine “Vacancy” Definition

In IRMI Update 283, readers were advised to beware of vacancy exclusions in commercial property policies. It is also critical to read and understand the definition of “vacancy” in each property policy form, since those definitions vary. In the majority of policy forms, “vacancy” is defined as a building that is empty or contains only limited business personal property for more than 60 consecutive days. A building with an appreciable amount of personal property is usually considered unoccupied but not vacant.

Some policy forms expand the definition of “vacancy” to include a building that is unoccupied, which means that customary operations have been suspended, but personal property has not been removed. Some definitions go so far as to restrict coverage when a building or plant has ceased operations or has been unoccupied or vacant for more than 60 consecutive days. I recently testified in a case involving a theft loss of almost $1 million where a large warehouse was stripped of everything of value. The agent was found negligent for not making their client aware that a building used for storage was considered vacant based on the definition in the policy form used that year. The previous year’s policy did not define vacancy to include unoccupancy, but the form used at the time of the loss had the broader definition of “vacancy” which excluded coverage for the theft loss.

Another instance resulting in the “vacancy” trap could involve a real estate owner who has several buildings in one project, such as office warehouses. Many times a definition of “vacancy” will refer to a building that is less than 30 percent occupied. A project of several buildings may be less than 30 percent unoccupied, but one building in the project could be vacant. That building is vacant per that policy definition.

It is incumbent on the agent or risk manager to understand the specific definition of “vacancy” used in the policies they sell or buy and to ask the right questions about vacancy to avoid embarrassing coverage gaps such as this.

By: Joe L. Williams, CPCU, Partner
PozmantierWilliams Insurance Consultants LLC