Vacancy Provisions in a Property Policy
Property and Casualty Insurance: Vacancy Provisions
Many businesses, including manufacturers, have multiple buildings insured on their commercial property policy. The property coverage for these buildings will typically be written on a coverage form that’s referred to as a “special form” – meaning that all causes of loss are considered covered, unless specifically excluded. Additionally, the property policy will more than likely be written to provide coverage for these buildings on a replacement cost valuation basis. This means if there’s a covered loss to a building, the building will be replaced with materials of like kind and quality, and there’ll be no deduction for depreciation. But what happens if, for some reason, you own a building (or are required as a tenant of a leased building to insure the building) but aren’t actively using it? The vacancy provision of your property policy is a provision you should be very familiar with because, in the event of a loss, it could drastically affect the coverage you thought you had.
Most property policies will contain a vacancy provision stating if there’s a loss to a building after it’s been vacant for a specified period of time (this period of time can range from 30, 60 or 90 days), there’ll either be no coverage for any loss or no coverage for exclusions added by the vacancy provision, such as: vandalism, water damage, building glass breakage and theft. Additionally, if you have a loss to your vacant building due to a covered cause of loss, such as fire, the vacancy provision could potentially limit coverage. The provision might state they’ll deduct a certain percentage of the loss, such as 15 or 20 percent, from your claim payout. Finally, instead of receiving a replacement cost valuation for your building, the vacancy provision could amend the valuation to actual cash value (ACV), meaning they’ll deduct the depreciation from the value of your building.
Because vacancy provisions differ from policy to policy, and have different definitions of vacancy, it’s important to consider how you’re using each of your insured buildings and that you review this section of your commercial property policy with your insurance broker. This review will assist in determining how to move forward with insuring a building that might be considered vacant. This is just one important part of minimizing risk within your overall insurance program.
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