BEWARE THE VACANCY PITFALL
Insurance companies hate vacant buildings since they present an increased risk of loss. Accordingly, policies insuring both residential and commercial risks contain specific provisions reducing coverage in the event of vacancy. In some instances, the provision constitutes a hidden pitfall for the unwary insured.
Homeowners' policies usually contain an exclusion for losses from vandalism and malicious mischief if the dwelling is vacant for more than 30 consecutive days immediately prior to the occurrence of the vandalism or malicious mischief.
Commercial policies, on the other hand, usually insure against risks of direct physical loss or damage unless excluded or limited by the terms of the policy. They follow the ISO model and bury the vacancy provision in the conditions section of the policy. The vacancy condition exempts coverage for damage from vandalism, building glass breakage, water damage, theft or attempted theft or sprinkler leakage (unless steps have been taken to protect the system against freezing) if the building has been vacant for more than 60 consecutive days. All other coverage is reduced 15% because of the vacancy. Although this reduction is a limitation, it is not set forth in the coverage limitations section of the policy.
Commercial policies further define vacancy to require the insured to be using at least 31% of the building for customary operations. Residential and commercial policies exclude buildings under construction or renovation from the definition of vacant.
A problem can develop if a partial loss renders the structure uninhabitable or not usable and the insurer does not complete the adjustment of the loss within the vacancy time frame and the insured has no funds to commence repairs or rebuilding. A typical vacancy loss may not be covered and other losses may be covered only for 85%.
Two reported cases in New Jersey are not helpful. A 1913 decision by the old Court of Errors and Appeals, Kupfersmith v. Delaware Insurance Company, 84 N.J.L. 217, upheld an exclusion from coverage when the property was vacant for more than 10 days on the theory that the insured could have insisted that the insurer provide a longer period of permitted vacancy. Thus the Court would not consider the cause of the vacancy. Note that this decision was written decades before the Courts recognized that insurance policies are contracts of adhesion. The decision represents a minority view and has been rejected by Courts throughout the country.
Courts frequently follow the line of cases reasoning that the parties to the insurance contract did not contemplate that the property would not be occupied for an extended period because of a covered loss.
Unfortunately, in 2000 Kupfersmith was followed by the Appellate Division in City National Bank v. Selective Insurance Company, 331 N.J.Super. 298. In that case, the subject building, which was not occupied at all during the policy periods, suffered a loss from a frozen and burst water line and then a year later a sprinkler line froze and burst. The Court denied coverage for the second loss because the property was vacant for more than the permitted time. While this was a correct result given the facts recited by the Court, its reliance upon Kupfersmith was expedient but, perhaps, not intellectually honest.
In a situation where the building is not able to be occupied because of a covered loss, arguments to avoid the vacancy condition depend on the facts of the case, the language of the policy and the diligence of the parties. As an equitable matter, the vacancy condition should be suspended while the insurance carrier conducts its investigation and makes a coverage determination. If the policy gives the insurer the option to repair or replace the building, the vacancy condition should also be suspended until the carrier notifies the insured of its election. In any event, if it is at all possible for the insured to commence repairs, even at a tortoise pace, the vacancy condition can be nullified. Regardless of the vacancy condition, your insured must protect the property from further loss and thus some efforts should be made to secure the damaged building.
As a tactical matter, you as the insured's representative can notify the insurer that the insured considers the vacancy condition to be suspended pending the insurer's determination of coverage, payment of the loss or election to repair. This would also give you the opportunity to request an advance or payment of the undisputed amount of the loss so that repairs can begin.
As always, if we can be of assistance to you or your insureds in this situation, please feel free to contact us at 973-538-4100 or by email at email@example.com. We are here to help!