Property Insurance

Publication year1987
CitationVol. 16 No. 10 Pg. 1828
16 Colo.Law. 1828
Colorado Lawyer

1987, October, Pg. 1828. Property Insurance


Vol. 16, No. 10, Pg. 1828

Property Insurance

by Lynn Willcockson

Because the insurance industry is cyclical, it is important for lenders, landlords, tenants, building owners and their attorneys to be aware of the availability, afford-ability and terminology associated with insurance coverage. This article provides a brief discussion of property insurance.

Vacant and Unoccupied Buildings

Property insurance policies contain a clause called the "vacancy or unoccu-pancy" clause. Briefly, it states that the company shall not be liable for loss by vandalism or malicious mischief occurring after a described building has been vacant or unoccupied for a period of thirty consecutive days. Further, the clause provides that the insurance company will not be liable for a loss caused by any other insured peril after the building has been vacant for a period of sixty consecutive days. After thirty days, there is no vandalism protection; after sixty days of vacancy or unoccupancy, coverage ceases entirely.

How then are vacant or unoccupied buildings insured? The availability of such insurance in the Denver metro area is less than it used to be, due to high vacancy rates and to the claims experience of the standard insurance companies. The question then becomes one of affordability and creativity.

For example, the normal property premium for a year for a particular building valued at $500,000 was approximately $4,000. The tenant moved to larger quarters at another location, and the insured landlord was faced with insuring a vacant building. Without a new tenant lined up, the landlord had to buy coverage for a vacant building that would only protect against fire and the perils of extended coverage, such as wind, hail and smoke damage. For three months, the landlord paid a premium of $7,500 for less coverage on that same building. The landlord later secured a tenant to move in and use the building as a warehouse for used furniture and obtained another policy on an annual basis for $10,000.

The $10,000, of course, is considerably higher than the $4,000 paid under the original occupancy; however, in comparison, $10,000 for twelve months' coverage was better than $7,500 for three months'. In this case, the landlord was creative. He leased the space for $5 a month to an organization that picked up used furniture around town. Obviously, the landlord lost money on the rent but saved money on insurance.

Another possible solution to covering vacant buildings is to buy for a short-term period to meet only the needs, for example, of the lender. Splitting coverage among standard companies is another solution. For example, three standard insurance companies each took a third of the coverage for a vacant building in Colorado Springs that is worth $1.8 million. The owner obtained a package of insurance at fairly standard rates, but which limited the exposure of the insurance companies. From a liability standpoint and as a condition of the policy, it is important to know that some companies will insure vacant buildings only if the first floor level windows and doors are boarded up completely.

Insurance Required by Lenders

A lender hesitates to accept insurance for anything less than the face amount of the loan, perhaps to show loan protection for the benefit of the lender's auditors. The borrower is then paying for insurance that will never be paid at a higher premium. In property policies, there are certain exclusions, one of which is the foundations of the building below the surface of the lowest basement or, if there is no basement, below the surface of the ground. Foundations are not covered by the policy, but the lender might require that the construction cost of the foundation be accounted for in the amount of insurance.

When a policy is...

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