Insuring Vacant Buildings

Vacant buildings, especially recently, are a fact of life. There are a few things that everyone should be aware of with insuring vacant buildings, especially going into the winter.

A vacant building is any building, which contains no furniture, fixtures or equipment and is not used on an ongoing basis. It also has not been used for at least 30 days. Vacant buildings are prone different risks than occupied ones. They have higher rates of vandalism and theft of building property. Vacant buildings also have higher rates of frozen pipes because they are frequently not winterized.

There are real consequences for insurance on vacant buildings. If you do not tell the insurance company that the building will be vacant and you have a claim, payouts are often reduced by 15% and there is no coverage for loss by damage in the course of a theft or vandalism. Also, frozen pipe claims are generally excluded when the pipers were not drained or the building was not heated.

If you do tell your insurance company that a building is vacant, they may choose not to renew the policy. If there is a plan to re-occupy or dispose of the property, than the insurance company is likely to grant a "vacancy permit" which gives most coverage back on a vacant building and eliminates the claim payment penalty. If you happen to have a number of buildings, most companies have standards for vacancy percentages. Alternative insurance is available specifically for vacant buildings. These policies are easy to obtain, just ask your current broker.

It's best to have a plan for your vacant property. Even hold for 12 months pending market improvement then list for sale is better than not offering a plan to use the property. And while you hold the property, there are some things that you can do to minimize your risks. If it is a residential property, make it appear occupied. You could put some lights on timers, leave some furniture in the home, or install some "staging furniture" (made entirely from cardboard). At the very least, drop by the property on a weekly basis, keep the lawn mowed, and in the winter drain the pipes if the building will not have heat.

With a little time and effort, you can really minimize the chance that you will take an uninsured loss on a vacant building.

If you just need the insurance - call my office today - 312-566-9700.

Property Insurance Limits in a Declining Real Estate Market

It wasn't that long ago insurance agents were explaining to property owners and mortgage brokers that they didn't need an $800,000 homeowners policy on a 2000 square foot house, even though that was the market value. Property insurance valuations can be done on three valuations, replacement cost (what it would cost to rebuild), actual cash value (replacement cost less depreciation), or agreed value (a fixed number agreed with the underwriter).

The vast majority of property insurance is written on a replacement cost basis. The idea is that if there was ever a total loss to the building, most people would want the ability to rebuild. Replacement cost includes the increased (or decreased) cost of updated building methods and includes the cost of construction to current building codes. Replacement cost is not market value. Market value is what someone is willing to pay for the building and the land in its current state. Replacement cost does not include the value of the land, which can not be destroyed. Just a few years ago, in the booming real estate market, replacement cost was usually less than the market value of the home. Insurance agents were constantly explaining to insureds that just because their house appraised for double purchase price several years prior does not mean that the insurance value needs to be increased. This fight was often lost with the mortgage company with the processor saying over and over again "we need to insure the mortgage value" or "that's not what the appraisal says." Many homes went over insured, and premiums were inflated.

Now most homes have declined in market value. Especially in urban settings, market value of the home is now replacement cost. So what's a homeowner to do? Well, it depends on your objective. If there was a significant loss would you rather rebuild at the same location, or take one of the comparable properties on the market at a lower cost? If you would want to rebuild, you need to make sure the insurance policy limit covers the cost to rebuild. Sometimes that can be found on an appraisal, but most mortgage companies don't require it to fund the loan, so it's often not done. If it wasn't done, your insurance agent can help you determine a replacement cost for you. This number could be higher than the purchase price.

If you would just buy a new home for market value (assuming it's still less than replacement cost), than you would want to insure your home for actual cash value. This is the replacement cost of your home, less depreciation, and is closer to fair market value. The cost per thousand of insurance is slightly higher, but the overall policy cost can be much less. As always, don't let someone else make your choice. Your mortgage broker isn't interested in protecting you and your insurance agent doesn't know what you want. Both replacement cost and actual cash value are good options. In light of deflated home values and foreclosures, evaluate all your options.

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