COVID has dealt another devastating blow. This one we will feel in the fall when we are expecting to spend our Saturdays cheering on our beloved Buckeyes. Like many other things that have been canceled in 2020, the Big 10 canceled the football season and left us wondering: how will we and many small businesses survive?

Buckeye football is like a religion. For most fans, your entire Saturday is spent preparing for the game, going to the game, celebrating after the game and before you know it, another successful fun-filled Saturday is in the books. Not only are fans going to suffer this fall, but Big 10 cancellation is detrimental to the bar and restaurant industry.

The Ohio Restaurant Association surveyed their members and 50% reported declined sales numbers of anywhere from 20-70% relative to the same time last year. For an industry that is already struggling due to COVID lockdowns and restrictions, the lack of Buckeyes football could put many out of business.

Restaurants and bars are not the only small business suffering due to the COVID pandemic. Many small businesses across the country are closing their doors permanently. Yelp shared that over 66,000 businesses who use their platform have closed due to COVID. According to data from the Small Business Administration, small businesses make up 99.7% of U.S. employers and 42.9% of private sector payroll. Over 50 million Americans work for small business firms and many of them are facing uncertain futures.

What about all that vacant commercial space?

Even prior to COVID, shopping centers and malls struggled for occupancy as adoption of online shopping spiked. Now, fear of COVID and additional restrictions have kept many Americans from venturing out as they did prior to COVID. The convenience of virtual shopping has many rethinking the need for brick and mortar space. If you are a commercial agent, it’s important your commercial property clients understand how this could affect their insurance policies.

Commercial property owners leasing to restaurants, beauty salons, gyms, bars and retail may be struggling with occupancy percentages that would technically classify the building as vacant. All commercial property policies contain vacancy clauses, and this will differ between carriers. Carriers use endorsements to vary coverage within their own forms for certain classes of business or depending on the risk. Don’t assume you know what the carrier’s property form contains – it’s important to read each client’s policy so you can accurately advise your clients.

How is vacancy defined?

Generally, the insurance policy will define vacancy in term of intent and timeframe as to not confuse it with a home or building being unoccupied. It’s crucial to understand how your client’s property policy defines vacancy. Since all policy forms are different, I’m using as my example standard ISO Commercial Property form CP 00 10 10 12 which defines vacancy as:

6. Vacancy
   • Description Of Terms (1) As used in this Vacancy Condition, the term building and the term vacant have the meanings set forth in (1)(a) and (1)(b) below:

• • • (a) When this policy is issued to a tenant, and with respect to that tenant’s interest in Covered Property, building means the unit or suite rented or leased to the tenant. Such building is vacant when it does not contain enough business personal property to conduct customary operations.
    • (b) When this policy is issued to the owner or general lessee of a building, building means the entire building. Such building is vacant unless at least 31% of its total square footage is: (i) Rented to a lessee or sublessee and used by the lessee or sublessee to conduct its customary operations; and/or (ii) Used by the building owner to conduct customary operations.

As you can see, CP 00 10 clarifies that the premise, the building, the unit, or suite that is leased to the tenant needs to contain enough business personal property to conduct customary operations and at least 31% of the total square footage of the building must be rented or leased to a tenant, or in use by the building owners. If those two provisions are not met, then the building is deemed to be vacant.

Vacancy Clauses Reduce Coverage

Because the vacancy of a building increases the likelihood of vandalism or undiscovered losses like water leaks, insurance carriers will use the vacancy clause to limit covered perils.

The below excerpt from the ISO Commercial Property CP 00 10 10 12 which reduces coverage of a vacant building:

1. Vacancy Provisions

If the building where loss or damage occurs has been vacant for more than 60 consecutive days before that loss or damage occurs:

(1) We will not pay for any loss or damage caused by any of the following, even if they are Covered Causes of Loss:

(a) Vandalism; (b) Sprinkler leakage, unless you have protected the system against freezing; (c) Building glass breakage; (d) Water damage; (e) Theft; or (f) Attempted theft.

(2) With respect to Covered Causes of Loss other than those listed in b.(1)(a) through b.(1)(f) above, we will reduce the amount we would otherwise pay for the loss or damage by 15%.

As you read the policy pay close attention to the words that are used. Notice that the form clarifies that the vacancy must be more than 60 consecutive days – this is an important distinction. Also, notice that while the policy form clearly eliminates coverage for certain perils if the building is vacant, it also reduces the amount of loss recovery by 15% for all other covered perils as well.

Don’t Forget About Risk Management

Be proactive. Reach out to your commercial property owners to discuss their occupancy rates – especially those with tenants in the retail, restaurant and bar industries. At the time of loss is not when you want to inform your client of the potential issues that could arise from the vacancy clause in the policy.

Are you using checklists in your agency? It’s a good way to keep yourself on track when reviewing insurance coverage with your clients. OIA has commercial and personal lines checklist that you can customize to fits your needs. If you are using a checklist, I would recommend adding vacancy and occupancy rates as part of the review. This will help you remember to have the conversation with your commercial property owners.

The checklist will also help with documentation. Documentation is one of the key practices of good E&O risk management. You want to be sure you are documenting your conversations with your clients and completing the checklist including client signature and placing this in the file is an excellent documentation procedure.

OIA Has Resources For You

If you don’t have a checklist and you would like to start using one, here’s a template for you to review and customize for your agency. Don’t forget to have the client sign the checklist and place it in the file.

If you do have clients with vacancy issues and you need markets to help you place the coverage OIA has relationships RT Specialty, AmWins, JM Wilson, and Arlington Roe who can assist you in placing coverage.  Some of the features of their vacancy markets include admitted carriers, no time issue with length of vacancy, replacement cost valuation, binding authority up to $10M with access to brokerage for higher limits, and special form cause of loss to name a few.

For more information regarding market access related to vacancy please reach out to Megan Smith at megan@ohioinsuranceagents.com.

While the Big10 cancelled the football season, unfortunately we can’t cancel the rest of 2020. OIA will be here to coach you through all the changes and make sure you don’t get blindsided!