Businesses risk underinsurance due to differing unoccupied property exclusions

As many non-essential UK businesses were forced to shut from the 23 March to mitigate the coronavirus spread, they now face the prospect of being left uninsured once their property has been vacant for a certain amount of time. 

This is the period of non-occupancy in commercial property policies that dictates the length of time that a property can be idle for and remain covered. 

But property insurers are taking vastly different measures for unoccupied properties. For example, most commercial business insurance policies are reluctant to offer cover after the building has remained uninhabited for 30 days.

So far three insurers have lifted their unoccupied property exclusions and amended policy wording to lengthen the period of non-occupancy from 30 days to either 60 or 90 days.

Meanwhile MGA Aqueous Underwriting waived its policy conditions for unoccupied properties completely, this means that these businesses will now be covered for claims such as water damage, theft and escape of water (EoW) even if the properties remain unoccupied.

But these changes also put brokers and insurers under significant pressure, and insurers could find themselves exposed to significant losses and problems such as squatters, vandalism, arson and theft warns commercial property insurer FM Global. 

Differing approaches

Ashwin Mistry, chairman at Brokerbility, told Insurance Times: ”More and more insurers are being flexible on a range of issues highlighted by a number of brokers. We had our wish list communicated and to date our insurer partners are responding well to almost all requests.”

He welcomed those lengthening the unoccupancy time period. ”We are still asking clients to ensure ’reasonable care’ in everything they do and record matters and keep us informed. As matters progress insurers are responding to changing circumstances quite swiftly” he added. 

But all insurers have different unoccupancy conditions and a different definition of what this entails, as specialist insurance commercial property broker 3 Dimension (3D) Insurance has identified by reviewing every insurer’s policy for unoccupied property.

RSA for example does not require the unoccupancy conditions to be complied with until the property has been vacant for 30 days. But if premises have to be shut due to lock down, it will not enforce its policy provisions.

Keith Langton, director at 3D Insurance, said: “The principle of ‘treating the customer fairly’ has been highlighted by the insurers and they will look kindly upon any cases where the virus has resulted in a period of unoccupancy.”

What does ’unoccupied’ mean?

But this isn’t the only thing that can differ in a commercial property policy.

Michael Hogg, partner at law firm Kennedy’s, told Insurance Times that even the definition of what it means to be unoccupied can vary across different policies.

”The very definition of ‘unoccupied’ has to be understood within the policy – definitions can differ,” he said. “Unoccupied might refer not only to a lack of occupation, but also a lack of use or an absence of a tenant – what happens if a tenant becomes insolvent during an extended lockdown? Properties can become unoccupied when they are not being actively used, and that might become an issue in dispute – is a visit every couple of days by one employee active enough to be occupation?

”In the consumer market, what about an elderly person admitted to hospital for an extended period with no one able to check on their home due to the current restrictions? Any claims occurring once the property is deemed unoccupied might not be covered for all risks. Insurers should be unsurprised if the Financial Ombudsman (FOS) take a very sympathetic line not just with consumers, but also small businesses benefiting from the FOS’s recently extended jurisdiction.”

He also urged brokers to take care and advise their clients appropriately to ensure a policyholder’s obligations under the policy were properly met.

”Property underwriters generally do not like unoccupied premises – malicious damage, theft and escapes of water suddenly become more likely or damage becomes more severe,” he said. ”Having more time before a property is deemed ‘unoccupied’ within the policy’s terms will be a great benefit to insureds, but care must be taken by insureds that any conditions precedent or warranties are still observed.

”New obligations on the insured might come into effect once the property is unoccupied, such as cutting off water, which an insured might have difficulty complying with in these strange times. Restrictions on cover often come hand-in-and with obligations to notify insurers when a building becomes (or is deemed) unoccupied. Insureds should not assume that their insurer will know that their property will be unoccupied due to the government’s advice on social distancing. Policy terms should still be followed, and insurers notified, if cover is not to be prejudiced.”

Unusual glut 

Richard Houseago head of the property risks and coverage team at Keoghs told Insurance Times that the mandatory closure of certain businesses and current lock down has led to “an unusual glut of empty commercial properties”. 

”Usually ’occupation’ for insurance purposes requires some meaningful and substantial presence of persons at the premises on a regular basis, so business owners do need to be careful to discuss their circumstances with their own property insurers or their landlords, depending on who makes the insurance arrangements,” he said. ”Covers may otherwise automatically be subject to certain additional security and risk-avoidance requirements as soon as the period of unoccupancy begins and cover may restrict very significantly in scope once the property later on comes to count as ’long term unoccupied’. It is vital that business owners check the terms of cover so as to explain the situation to their insurers and to understand all the implications.

”The FCA has indicated its expectation of fair and reasonable treatment of policyholders and the market is providing a high degree of flexibility in exceptional times – so there should be no problems that cannot be worked through. But it is really important to have the conversations rather than risk the efficacy of the cover.”

Appropriate provisions

Zurich adopted a similar approach to Aqueous Underwriting with Biba’s executive director, Graeme Trudgill welcoming the move. The insurer said in a statement that it is making “appropriate provisions to mitigate their unoccupied risk as a result of coronavirus, the temporary closure of your building should not prejudice any claim made”.

Where buildings are temporarily closed due to the pandemic its unoccupied conditions would not apply and it will not be taking further measures to restrict coverage.

Meanwhile AXA and Allianz took a similar approach extending the unoccupancy period to 60 days. A spokesperson for AXA, added: “That means full cover remains in place for 60 days, during which we ask customers contact AXA or their broker to discuss what needs to be done at the end of the period.

“In terms of security and safety measures, we will always try to be as flexible as possible in these circumstances, but this will be down to the individual risk. We strongly advise that premises be made secure and any guidance on risk management is followed, but we will not classify the premises as empty until the 60-day period has expired.” It recommended that its clients review their policy wording and get in touch with any concerns. 

Allianz on the other hand hopes its own measures will provide support and reassurance for its customers. Paul Higham, head of property at Allianz told Insurance Times: “We know this is a really challenging time and unfortunately some premises are temporarily unoccupied because of the Covid-19 outbreak. For our standard commercial policies, we normally ask to be notified if premises are going to be unoccupied for more than 30 consecutive days and for our SME wording we ask to be notified if it’ll be empty for 45. In light of the current situation we’re now extending both periods to 60 days. As this is an evolving situation, we will also continue to review our position.”

Greater risk

Direct Line extended its period to 90 days as of the 24 March 2020 which is said is a temporary move.

It said that any building left unoccupied naturally poses a greater insurance risk and we therefore need policyholders to take the following additional measures for the above extension to apply, including turning off the gas, water and electricity at the mains where practical, ensuring the premises are properly secured and removing combustible materials during each inspection.

A spokesperson for Direct Line said: “We support the government’s guidance around non-essential travel and have waived the requirement for individuals to check on their unoccupied business premises regularly if you are unable to incorporate this into your daily exercise or other essential travel during the government lock down period. This is on the basis that individuals have followed the steps above (where possible) ensuring premises are suitably secure.” 

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Read more…Big Question April 2020: Are insurers right to refuse coronavirus business interruption cover?

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