With many dealerships adhering to the state government orders restricting their operations, could insurance occupancy and vacancy clauses pose serious first-party coverage denial or limitations?
Many insurance carriers routinely include and define words like “occupancy” and or “vacancy” in property policies. Standard occupancy or vacancy clauses (i.e., “ISO”) typically deny or reduce coverage during a vacancy. Also, most of the qualifiers for a vacancy under ISO depend on whether the policy is issued to a tenant, owner or general lessee of the building, the contents in the building, percentage of that occupancy and the ability to resume operations. However, most carriers do not use standard ISO language. Indeed, in many cases the carrier’s proprietary language about vacancy and/or occupancy will restrict coverage. Finding coverage under a vacancy or reduced occupancy will depend on whether a policy includes a vacancy or occupancy clause and how these clauses are defined in policy.
What triggers an occupancy or vacancy clause?
A vacancy or occupancy clause will define when a property is considered “vacant” or “unoccupied” and what conditions would trigger coverage limitations or a denial. For example, an ISO form might set a period of 60 days before the vacancy clause would trigger, but proprietary carrier forms could provide less or more time to trigger their own clauses. Depending on the cause of loss, say a fire or theft, coverage may be reduced or denied completely. Again, this largely depends on the language of the clause and not all insurance carrier vacancy clauses are the same.
Carriers will determine ability to resume operations by evidence of personal property in the property at the time of a claim, and depending on the type of insurable interest, what percentage of the building was, or could be, used when the claim occurred. Under the ISO form, whether a property was vacant at the time of a loss depends on whether the building had personal property in it necessary to resume normal operations. Since coverage limitations depend on the insurable interests, the adjuster reviewing the claim will determine whether the policy was issued to a tenant, owner, or general lessee of the building . The adjuster will then review the definitions of vacancy to determine the building was vacant when the loss took place. This includes considerations such as whether there was personal property in the building to conduct operations and what percentage of the property was being used. For example, for owners and general lessees, ISO has an activity threshold providing that at least 31% of the building must be available to resume operations. ISO forms are a little more straightforward for tenant interests. “Building” is defined as the area or suite rented to a tenant and whether there is personal property in the building to resume normal operations. If these conditions are met, then the vacancy clause will not apply to a tenant’s interests. In relation to the current pandemic and the resultant shutdown of business, ISO forms do not present as much of a coverage concern.
Carriers do not always use standard ISO Language
Some carriers may use the term “vacancy” and or may introduce, define, and use the term “occupancy.” Rather than “stuff” or percentage of “stuff” in the building to operate or resume operations, the definition may extend to percentage of occupancy in that building, or people there using the “stuff” when the claim occurred. Many carriers will place tougher definitions within their vacancy clauses to overcome. This will serve to further restrict coverage and it could cause coverage issues, coverage denials, even during a temporary but prolonged shutdown. Recall the number of days that must pass to trigger a vacancy clause: Is the carrier using 30, 60 or 90 days? Typically, this period is increased to 90 days, on non-standard forms, but there could be exceptions. Many forms state that vacancy kicks in when 70% of square footage is not being used for its intended purpose when there is a tenant, or when the building is used by the owner if 70% of the square footage is not used for normal and customary operations, or that the building is vacant if it does not contain enough personal property to conduct customary operations. If these conditions are not satisfied, then an insured is subject to reductions in their coverage. This is different from the ISO definitions because under such a proprietary form, the operational activity at some percentage is required after a set period of time passes.
Under the current shutdown, this could significantly reduce or remove coverage depending on the cause of loss. Vandalism may be completely denied, while recovery by an insured interest for an accidental fire might be significantly reduced. Also, since the forms are not uniform, it is likely that your policy has some variation between ISO and the proprietary language. What the vacancy or occupancy clauses say depends on the insurance carrier, which forms they use, what forms an underwriter will provide your business, and a state’s insurance regulators agreeing to let the carrier use a particular form. Again, it is important to understand that because these forms are not standardized, the same definitions are not used between insurance carriers. The language used to define vacancy or occupancy may be different than these examples.
Since there are many differences in these clauses, how is a business supposed to know if there is coverage for what would otherwise be a covered cause of loss, such as theft, vandalism, or for an accidental fire that occurs during the shutdown?
The first thing a dealer should do is contact their insurance professional. They can help identify and review the policies you purchased, and your broker is in the best position to let you know if you should be concerned. It is important to note that other lines of coverage like general liability, crime policies or any “bailees-type” coverage could have similar vacancy or occupancy clauses. Ask your broker to identify which policies have a vacancy and occupancy clause and get a complete copy of those policies. Then review the coverage. Relate the language in the policy to how the shutdown has reduced the occupancy and/or complete vacancy of your building. Apply it to the definitions in your policy for vacancy and occupancy triggers under the clause. This will allow you to identify if and in what way the current situation could lead to a limit or denial in coverage.