The most common property form in use for commercial buildings is the ISO form, CP 00 10 04 02.
The language of the form states explicitly: “Buildings under construction or renovation are not considered vacant.”
Some brokers will advise their building owners that because they have “construction going on” in their buildings, right? [wink-wink], they needn’t worry about the vacancy clause. Such flippant advice is fraught with peril for both the broker and the building owner client.
Having had private conversations with many of the national insurance companies’ property claim specialists, I can report that there is no consensus, other than “vacancy” status would be decided at the time of the loss.
You may remember from a previous post, a building is considered vacant if occupied less than 31% for 60 consecutive days.
The one consistent theme from the property loss specialists was that “on-going maintenance” is not synonymous with “construction or renovation.” The degree of difference in distinguishing one from the other varied materially between insurance companies.
Some companies would look for a renovation plan with drawings and a schedule, and evidence of its execution, including invoices and payments. Others would simply eyeball the surroundings, and determine if they thought there was any serious effort to perform any work beyond Spackle and touch-up paint.
What can you do to protect your building from the perils of the vacancy clause?
- Get it leased asap! Easier said than done of course.
- Get it ready for occupancy with a generic renovation plan, including drawings, involving various artisans. Begin to implement the renovation plan, but “slow-foot” it, in order to keep the 60 day vacancy clock from expiring. Each time there is work done under the renovation plan, it may technically reset the vacancy clock back to 60 days again. Documentation is important; being able to produce plans, artisan invoices and payments, all help support your “renovation” status.
- Increase security (for god’s sake, don’t cut the monitoring because there is no tenant!). In addition to monitoring, add physical patrols, and regular walk-throughs.
Caution: the bigger the loss, the more detailed scrutiny in its adjustment. A slow-footed renovation schedule may satisfy some insurance companies, but it’s not bulletproof.