Vacancy rates for commercial real estate in Toronto have fallen consistently since the beginning of 2014 to a record low of 3.8 percent. Currently, a construction cycle is underway in the major metropolitan area that will result in 3.2 million square feet of added new commercial space.1 To answer key questions on Commercial Vacant Property insurance for brokers Insurance Market Source recruited Tyson Peel, National Property & Casualty Manager, Burns & Wilcox Canada, to discuss.
1. What constitutes a piece of commercial property as vacant?
Tyson Peel (TP): Any property earmarked for business or non-residential use that is not occupied for 30 days or more is considered vacant property. This makes it especially important for brokers to keep in touch with clients who own and lease commercial property to discover whether they are occupied or not. If the property is occupied, brokers should understand how long the tenant’s lease lasts. Knowing this will allow both the broker and client to prepare for a period of vacancy in the event that another tenant is not lined up. If the property is empty, monitoring the length of time it is vacant is key as insurance carriers can deny a claim against a regular Commercial Property policy if it becomes vacant and the client did not disclose that information. An explicit exclusion on a regular Commercial Property policy typically states that coverage will lapse if the property has been vacant for more than 30 days. To prevent large potential losses, brokers should advise clients to be forward-thinking and plan to obtain quotes on potentially vacant property at least 30 days ahead of the vacancy, if possible.
2. Once the property is vacant, what key advice can brokers offer clients?
TP: First, brokers should advise their clients to secure monitoring of the property every 72 hours at a minimum. Vandalism and mischief in British Columbia, Alberta, and Saskatchewan amounted to 45 percent of the 274,725 total property crime violations in Canada in 2015.2 This mitigation tactic is actually a requirement in these policies and can aid clients in reducing vandalism to the property—a significant tactic as vandalism is no longer covered in Commercial Vacant Property insurance policies. Second, if a vacant risk is undergoing renovations or retrofitting, the broker should consider recommending Builder’s Risk coverage to their clients. This will provide the additional required coverages to incorporate any renovations or rebuild projects. With the proper monitoring and security a vacant building can be protected.
3. Are there any other changes to the Vacant Property insurance policy that brokers should be aware of?
TP: There has been quite a bit of a change in the marketplace. The more common form of coverage for Vacant polices has always been Named Perils. This provides coverage for specific perils, such as fire, explosion and windstorm or hail. Now, the market is very competitive and it is commonplace for carriers to either offer more coverage or lower prices. Broad-form and all-inclusive policies are available, with certain warranties removed, including replacement cost on building. These policies now include or sublimit vandalism, water damage and theft. Without a broad-form policy endorsement, the traditional Vacant policy would exclude each of the above perils.
4. What are some other important tips that brokers can share with their clients?
TP: Regular and frequent communication with your clients is recommended. Finding a tenant for commercial space is not always a simple endeavor. The majority of carriers offer Vacant Property policies in either three- or six-month terms for a maximum length of 18 to 24 months. The idea behind this is that carriers want an update on what is happening with the property named on the policy. If the building is left vacant for an extended period of time, then the moral hazards of insuring the building increase and the potential for claims increases. Updates to the insured property are key to this type of coverage. Brokers should keep in constant contact with clients to stay abreast of any status change with the tenant or property. The insured’s policy might change and a more comprehensive or different policy type may be required.