Insurers are restricting the availability of theft and vandalism coverage in the vacant property insurance market, where there is still plenty of available business.
Vacant property provided a boost for some insurers looking for additional income to pad their books during the worst of the economic downturn. However, some of the carriers are now shying away from this segment because they are getting burned by theft and vandalism claims from copper wiring theft and other criminal acts on vacant properties.
Placing business is becoming very difficult because some vacant properties are required by the lender to have theft and vandalism coverage.
“Carriers are being overly cautious because of the economy and the price of metal,” says Roxanne Logan, property/casualty underwriting manager for Burns & Wilcox’s Special Risk division in Farmington Hills, Mich. “It is a huge target, especially on these vacant buildings and also homes.”
Brian Ruane, executive vice president and National Real Estate and Hotel Practice leader for Willis in New York, says the theft is not always the most expensive aspect of these claims.
“When thieves come to steal copper, the value of the copper is lost, but the damage they do is very substantial,” Ruane says.
Carriers are now looking more closely at deductibles, decreasing sublimits, or in many cases excluding coverage altogether, says Rod Taylor, senior vice president for Distinguished Programs in Dallas. He says this is especially true of some of the newer carriers to this market, because they are experiencing losses they were not prepared for.
“There was a very opportunistic attitude of ‘let’s get into this class’ without them really understanding the nuances of this market and how it is different from homeowners or property coverage,” Taylor says.
Even established carriers in the market are watching their backs. Logan says some of her company’s Lloyd’s contracts will not provide any theft coverage, and others allow it but will limit what they offer and have stipulations such as requiring that the property have a burglar alarm.
Another issue for vacant property writers is the length of time a building is vacant.
The longer a property is left vacant, the more potential there is for problems because it’s likely not being checked on or taken care of. If something like a burst pipe occurs, an abandoned property will have more damage and a higher claim because it might not be discovered for a long time. There is also more likely to be theft or vandalism on long-term vacant buildings.
“If you don’t get in and check on the building for months, the damage can be thousands of dollars,” Logan says. “One of our forms says that the owners have to check on the property frequently. They don’t define frequently, but we expect it to be every week.”
Logan says there are still just as many, if not more, vacant commercial properties out there compared to a few years ago, and it is taking longer for them to become occupied.
“If a commercial building is not in a booming area, then it may never be occupied again, so obviously that is a big moral hazard,” Logan says.
Some carriers are placing restrictions such as not continuing coverage if the building isn’t occupied after three years. In some circumstances, Logan says, for instance if a building is newer, Burns & Wilcox has been able to extend coverage to four or five years.
Home sales are increasing, which should mean fewer vacant homes.
Distinguished Programs also has seen a switch from purely vacant to vacant-but-being remodeled, which has led to an uptick in their builder’s risk book.
“Foreclosed properties aren’t treated with much tender love and care, so someone has to go in and do some fix up; we see a strength of the marketplace there for us,” Taylor says.
Kellam Radford, who is also a senior vice president for Distinguished Programs in Dallas, says some carriers will endorse home improvements on a vacant property policy, but there are also specialized coverages in those situations that need to be addressed.
Taylor’s company has been working with clients to inform them of the differences.
“We have written a number of properties that started out on a vacant form and then the insured decided to do work so we convert to the policy to a builders risk form. That is a better avenue than endorsing onto vacant,” he says.
Ruane says despite the vacant property coverage issues, rates have remained stable for now. Willis started its Distressed Assets Practice two years ago to advise clients on managing the risks that come with financially distressed, foreclosed or abandoned properties.
“The one thing we tell our brokers is when you have an issue relative to vacancy, make sure to communicate to underwriters so there are no misunderstandings at the time of a claim,” Ruane adds. “Clients need to fully communicate all relative issues so there are no surprises.”