How unoccupied / vacant commercial property insurance can protect your investment
Whether you’re a developer, property manager or owner, you’ll know how important it is to safeguard your commercial property with the right insurance – particularly if it’s a property that has been left vacant for an extended period of time.
Vacant commercial property insurance is becoming increasingly common, more so in WA with the downturn in the economy over the past several years, where many businesses have been supporting the resource industries. Given recent increases in enquiries to insure vacant properties, we’ve put together some key points surrounding the commercial property insurance market and the bearing this can have on vacant property.
The stats: current commercial property vacancies
The last 12 to 18 months have seen a fluctuating 20-25% vacancy rate regarding commercial office buildings in the Perth CBD. However, this rate has been moving in the right direction recently with the vacancy rate dipping below 20% , indicating a slow but steady recovery. The Perth CBD vacancy rate has fallen for four consecutive quarters, a first since 3rd quarter 2010 to 2nd quarter 2011.
The story is a little different regarding industrial property, especially here in Western Australia where the heavy reliance on our resource sector has allowed supporting businesses based in industrial areas to ride the wave of financial success – until recently. It’s across the industrial property sector that insurers are really turning the screw and making it harder to insure vacant properties.
Many of these industrial properties are or have been tenanted by businesses that are often set up to host waste recycling plants and fuel depots, setups which are specialist and not easily re-tenanted overnight. Despite the early signs of a stabilising and recovering commercial property market in the CBD, vacancies across various industrial areas and office spaces outside of the CBD are expected to remain elevated for now.
Vacant commercial property insurance at a glance
Essentially, commercial property insurance protects the physical structure owned by the insured. Examples of events covered under the building insurance are Fire, Accidental Damage, Malicious Damage, and Weather-related damage (Storm Damage or Flood).
In addition to the foundations a commercial property insurance policy offers (insuring the building), there is a broad scope of options to cover further risks, some of which are included below:
- Loss of Rent
- Machinery Breakdown
- Rent Default
- Lease Incentives
- Additional Increased Cost of Working
- Claims Preparation Costs
- Developments Costs
- Loss of Attraction
- Loss of Attraction
- Fixed Costs Not Recoverable from Tenants
If a unit becomes uninhabitable following an insured event, the owner can claim for loss of rent or alternative accommodation whilst the premises are unfit for occupancy.
Complex coverage for large machinery, plant, and mechanical equipment, with options to include coverage for the resultant business interruption costs.
Protection against the loss of income resulting from tenant eviction, receivership, cease of rental payment, and tenants vacating the property.
Coverage for the costs required to attract new tenants to a property following a loss, including cash payment, reduction of rent, and additional fit-out expenses.
This provides coverage for advertising costs, rent-free periods, and to pay tradesmen overtime to speed up repair times and limit downtime. It also limits any reduction in turnover or revenue to maintain normal business operations.
Covers the cost of professional fees for the preparation, presentation and settlement negotiations for various types of large commercial property claims.
Allocates additional funds to the development of a property to attract new tenants if a property is damaged or destroyed.
General Area: Coverage for loss of rental income or disruptions in normal business operations if caused by the damage to a property adjacent from the insured property.
Anchor Tenants: Provides coverage for the loss of rental income or disruptions in normal business operations should a key tenant vacate the premises (ex. A large supermarket in a small suburban shopping centre).
This covers the expenditure necessary to induce tenants to lease or re-lease a building following reinstatement after a loss (including partial leases).
This covers certain after-loss expenses such as cleaning, taxes, pest extermination, building maintenance, and electricity.
The cover required for vacant commercial property insurance is more basic, in essence only requiring cover for the Building and for Public Liability, it does not include loss of income via Business Interruption. Just because there are less sections of cover being provided, this does not make it easier to put insurance cover in place, quite the contrary in fact.
So, what’s the issue with unoccupied buildings and why are they undesirable to insurers?
The underlying issue is that when a property is vacant, there is no-one onsite to monitor the property and react quickly to rectify or stop an incident from progressing. Consequently, there is also no one there to report the incident, resulting in events or damage that can spiral out of control quickly and cause even more damage.
Some other issues that can occur include:
The resultant property damage from such events can cost insurers tens of thousands of dollars in claim payouts. This can lead to insurers building a case for doubling or even tripling a premium at renewal, declining to quote again or even cancelling a policy halfway through due to excessive claims.
In terms of vacancy rate, at what point will my property become difficult to insure?
Should vacancy rates creep up to the 30-40% mark, commercial property insurance brokers may decline to offer terms on their policies. Properties that are 100% vacant can be very difficult to insure, especially those with a history of large or frequent claims.
Thankfully, some insurers do specialise in vacant commercial property insurance, so all is not completely lost. However, premiums for vacant commercial property insurance policies can be expensive; up to 3 or 4 times that of a tenanted building.
Additionally, it’s not uncommon for a single tenant to occupy 100% of the building in industrial areas (for instance, a logistics company could lease an entire warehouse and accompanying office). So, when one business folds or vacates a property, the whole building is instantly left vacant, bringing with it a whole new level of associated risks.
These properties may only be temporarily vacant for a short period of time (say, two or three months) whilst a new lease is finalised or a fit out is being completed. In most cases, these circumstances are normally acceptable to insurers, but insurers must still be notified of any changes as and when they take place.
What measures can I put in place to help insure my vacant property?
Whilst no guarantee, outlined below are certain measures that can be taken to find a solution for insuring vacant property.
- Security fencing (electric an option)
- Live CCTV
- Back to base alarm
- Monitored security/drive-by patrols
- 48 hours inspections
- Inform your broker of any tenant enquiries, leases being signed etc.
You may also consider undertaking some maintenance on the property to prevent incidents occurring:
- Disconnecting gas and water mains (where appropriate) or draining water tanks and pipes
- Turn off the electricity except when needed to power alarm systems and lighting.
- Having a representative visit the property on a regular basis (insurers prefer every 48 hours) to provide regular updates on the condition of the property
- Clearing the exterior of the building of cardboard, paper, brush and scrap wood to prevent fire
- Ensure parking areas and sidewalks are in good condition to reduce the risk of Public Liability claims
- Removing or securing any toxic/hazardous substances that could leak and cause contamination
- Erect obstacles to ensure pedestrians and vehicles stay out of the parking area (eg. a chain, gate or bollard)
The implementation of all or some of these measures can potentially make the difference to an insurer offering cover for a vacant property or not. At a minimum, putting these measures in place may deter an offender or prevent an incident from occurring in the first place.
What information do I need to provide you with?
As always with vacant commercial property insurance, the more information we can provide the insurers with the better. This will only increase the chance of finding a home for your property. The below details the key points insurers would like to know before considering such a risk.
Insurers also want to know details of the building itself including sum insured, fire and security details, age and claims history. If any of this information is unknown, we can carry out a site survey and provide the insurer with any gaps in information. We can also take photos of the property, something the insurers value and something we do quite regularly.