How unoccupied / vacant commercial property insurance can protect your investment

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.

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

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.

• Machinery Breakdown

Complex coverage for large machinery, plant, and mechanical equipment, with options to include coverage for the resultant business interruption costs.

• Rent Default

Protection against the loss of income resulting from tenant eviction, receivership, cease of rental payment, and tenants vacating the property.

• Lease Incentives

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.

• Additional Increased Cost of Working

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.

• Claims Preparation Costs

Covers the cost of professional fees for the preparation, presentation and settlement negotiations for various types of large commercial property claims.

• Developments Costs

Allocates additional funds to the development of a property to attract new tenants if a property is damaged or destroyed.

• Loss of Attraction

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.

• Loss of Attraction

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).

• Inducements

This covers the expenditure necessary to induce tenants to lease or re-lease a building following reinstatement after a loss (including partial leases).

• Fixed Costs Not Recoverable from Tenants

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.

Some other issues that can occur include:

• Theft of copper piping and other valuable fixtures
• Vandalism such as graffiti and broken windows
• Leakage of hazardous or toxic substances which can contaminate the soil or groundwater

• Drug users or squatters could move in, cause damage and refuse to leave
• Unlicensed parties could be held, causing damage to the property
• Suppression systems might be turned off, so if a fire starts it could spread and cause a total loss

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.

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.

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.

• 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.

• How long has the property been vacant and when do you foresee a tenant moving in?
• Are you actively seeking new tenants through leasing agents and advertisements?
• Have you received any enquires to lease your vacant property?
• What type of tenant activity are you likely/hoping to attract?
• Has a formal contract been signed to lease the property?