Risk Management Tips for Handling Increased Unoccupancy During COVID-19
Vacant or partially occupied commercial property has been considered high risk by property insurers for some time now. Even before the COVID-19 crisis it was becoming increasingly difficult to insure vacant buildings, as the frequency and cost of claims to vacant buildings increased.
What is the issue with unoccupied buildings and why are they undesirable to insurers?
When a property is vacant and nobody is onsite to frequently monitor the property and react quickly to an incident, the chance of a serious claim occurring is high. Consequently, there is also no one there to report the incident, resulting in events or damage that can spiral out of control quickly.
Although our movement has been restricted due to COVID-19, opportunists could unfortunately view this situation as a chance to cause damage in other ways, such as:
The COVID-19 situation has seen further increases in vacant tenancies, especially across the retail sector where coffee shops, restaurants and salons are no longer operating due to coronavirus. The Government has announced a range of measures intending to help tenants affected by coronavirus, which should at least ensure these vacancies are temporary and lease agreements are maintained.
However, as more retail tenancies are sitting empty it is important for landlords and owners to understand the risks associated with empty/inactive tenancies.
What are the insurers stances on vacancy during COVID–19?
Each insurer typically has their own policy guidelines regarding vacancy i.e. at what percentage of vacant leasable area they will consider outside of their underwriting guidelines. While insurer stances differ, a general comment would be that most will accept a period of between 60 and 90 days between tenancies for vacant buildings/units. However, we still recommend Landlords contact their insurance provider to ensure they work within these guidelines.
During this coronavirus situation insurers are expecting and making provisions for tenants not operating as per usual, so unless a tenant has moved out permanently (ceased trading entirely or broken their lease) then insurers are taking a lenient stance towards them not being there temporarily. If a lease in place, they will consider this as tenanted, but do expect certain practices to be maintained and/or implemented.
What can be done to protect your asset and manage the vacant/unoccupied risk during this time?
Insuring a vacant commercial property under normal circumstances requires you to meet certain criteria: the property must be professionally managed through an agency and must be inspected regularly (sometimes weekly) to maintain insurance cover. While these are not hard and fast rules during COVID-19, outsourcing management through a professional agency and inspecting at regular intervals to monitor its condition and security is still recommended.
If possible, we recommend increasing both interior and exterior security, including additional physical measures and patrols. Ensure alarms are constantly monitored and that any external security lights are in working order and remove/secure any valuables on site (i.e. cash or keys)
Fire systems (i.e. sprinklers, fire alarms, extinguishers, and hose reels) should continue to be serviced and maintained in accordance with appropriate standards. Ensure all fire protection equipment is operational and linked to a monitored source.
Plant and Equipment
Shut down or isolate any plant or equipment that is not in use or contains flammable liquids or gases (where possible). Isolate any gas, electric or water supplies that are not in use and purge any vapours to reduce fire hazards.
Manage any excess materials that may build up around the premises, such as rubbish bins, wooden pallets, or other combustibles in the vicinity of the building. Also, check the roof or gutters for any clogging or signs of damage and that the overall condition of the building is good.
The following is likely being carried out at all locations, however, we recommend reinforcing the importance of hygienic practices at a location. We highly recommend the following procedures are clearly laid out, perhaps with signs or posters at your property to remind workers and others of the risks of COVID-19 and the measures that are necessary to stop its spread:
- Allow staff to work from home where possible (relevant to employers more than property owners).
- Ensure physical or social distancing of 1.5m between people.
- Encourage frequent handwashing and provide hand sanitizer wherever possible
- Ensure the building is regularly cleaned and disinfected.
While we strongly recommend carrying out the above to risk manage your property, the current COVID-19 situation may prevent some of these being done. In this case, we recommend notifying your insurer if any fire, security or general maintenance cannot be carried out as per normal to prevent any issues should a claims scenario occur.
With the reduction of business operations across multiple industries, it’s worth considering backing up your suppliers as certain services/supplies are not readily available. Also, have an emergency contact to hand should an after-hours incident occur and make sure all relevant people have these contact details to hand.
What can I do to help reduce my insurance costs?
One of the primary drivers of insurance premium for Landlords is Rental Income, both on the Property and Public Liability cover. With the Government introducing a code of conduct for rent relief, we have been asked by our clients if there is potential to reduce the insured values on their insurance policies. This is a possibility, however, should you make a claim with these reduced values you run the potential risk of being underinsured, which could prove devastating and must be discussed before making any policy changes.
The easiest way to explain this is through an example, so we will use a Commercial Property owner providing rent relief to all tenants.
While there is a potential for short term savings, there is also a potential for long term crippling income losses. The risk of reducing income is not as detrimental for annual Public Liability policies but seek advice from your insurance provider before considering this. Our recommendation would be to reduce the Rental Income only if a tenant is vacating on a permanent basis e.g. break lease or if they have ceased trading entirely.
As mentioned previously, there is not a standardised insurance industry approach to this COVID-19 situation, however, insurers can accommodate requests on a case-by-case basis depending on the insureds particular situation.
Most insurers will consider extending payment terms to provide breathing space. KBI have also negotiated discounted premium funding interest rates on monthly payments to help with cashflow and reduce overall monthly costs. As mentioned, some of these options must be considered on a case-by-case basis by insurers, so speak with your insurance provider for advice here.
Useful Insurer Links
We are all in uncharted territory during this crisis, no one could have prepared for what has happened and although authority framework is being put in place, there is still a lot of reaction from industries as scenarios continue to unfold.
Now more than ever, we recommend speaking with your insurance provider before making any decisions, so please feel welcome to contact our office for any insurance related advice.
Stay safe everyone
Have any questions?
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KBI is a national specialist insurance brokerage that has rapidly developed a reputation for being the insurance partner of choice for the Commercial Property and Strata sectors, providing expert knowledge and specialised solutions across a range of asset types.
If you have any questions or concerns regarding the above, please contact us directly; we’re happy to assist. Chat to us on 1800 181 310 or drop us a line at: firstname.lastname@example.org.