National Underwriter - August 15 2011

For instance, the specific status of vacant property has become an important distinction, Shearman said, given that many properties today have “merely stopped in time” and are “expected to be used for the same use in the near term.” Because building contents and systems remain in place, these are more accurately defined as “idle” or “mothballed” properties. Truly vacant buildings, on the other hand, are properly buttoned down for the long haul, Shearman explained. Climate and alarm systems often are shut off, contents are removed, the building is infrequently serviced, and it may be secured in a more permanent manner with, for example, its windows and doors covered.

The differences between idle and
vacant buildings dictate different
approaches to risk management.
When preparing to idle a prop-
erty, Shearman recommended
conducting a vulnerability analysis
that takes into account key fac-
tors, including the length of time
the facility is expected to be idle,
natural and human threats, and
the balance between cost, security
and curb appeal (the last one very
important if the facility is for sale).
On the other hand, other consid-
erations apply if you anticipate
a long vacancy – in this case,
Shearman says, consider removing
copper pipes, external HVAC sys-
tems, and other assets that make
the facility attractive to thieves.
And there are best practices that
apply to all vacant properties – for
instance, fencing the entire facil-
ity can be highly beneficial, while
chemicals, flammable materials,
outside storage units, and other
high-risk elements should be re-
moved whenever possible.

A New Attitude for Insurance Companies

Insurers’ attitudes towards vacant property have undergone a major shift. Historically, Zoides noted in his presentation, those seeking insurance cover for vacant buildings typically turned to excess and surplus companies; standard carriers avoided vacant buildings, fearing opportunistic moral hazard claims and penalizing vacancy through rate and coverage restrictions. With proliferating vacancy and a soft insurance market, many standard insurers now enthusiastically underwrite vacant property coverage, sometimes at a discount.

That said, the more effectively you manage your vacant property risk, the more options you have for coverage. For example, do you want a Protective Safeguards Endorsement? Maintain your automatic fire suppression and a private fire department contract, keep the burglar alarms on, and in winter run the heat while turning off the water supply (thereby avoiding freezing of pipes peril). These days, you can even get a Secured Vacant Building Warranty.

Various factors impact underwriting of vacant property coverage – including length of vacancy, ownership status (is this a foreclosed property?), and property valuation. Zoides also said that, for insureds and underwriters, it is “imperative to get a loss control inspection” that takes into account factors such as unsecured entry points, poor building maintenance and monitoring, pre-existing damage, deterioration of mechanical systems, and trespassers.

Unfortunately, Zoides adds, building owners often place a low priority on implementing the recommendations of a loss control inspection. Cost is a critical constraint for building owners and property managers holding valuable but currently a non-productive real estate assets.

However, Zoides and Shearman both emphasized, every step taken to manage vacant property risk should be considered an investment towards eventual turnaround in the CRE market – by protecting valuable assets from avoidable risks, and by securing sufficient insurance cover for unavoidable losses.

John De Witt, a contributing editor to PropertyCasualty360 and National Underwriter Property & Casualty, is principal and senior consultant for JW De Witt Business Communications in New Salem, Mass.