Distressed and Vacant Properties Fill a Void for Insurers

By | July 22, 2010

The vacant and distressed property segment, which was barely thought of two years ago, has been a beacon of light for insurers. This class has boomed over the last couple years as the economy has forced the closure of many businesses and halted many construction projects, resulting in a huge number of vacant buildings across the country.

Distressed and vacant properties include buildings or residences that have been abandoned because of the tenants being unable to pay their lease or mortgage. This can also include an office park where some of the buildings are still occupied but others are not, or it can include construction projects that were started and then abandoned because the financing for the project dried up.

Security and maintenance are crucial for vacant buildings as they are targets for thieves that steal copper wiring or other parts of the building. They are also susceptible to other losses such as electrical malfunctions or frozen pipes in areas like the Northeast and Midwest. The vacancies also pose a significant risk and financial burden to the owners or banks that still own the property and coverage is often necessary to ensure that building is covered in the event of a loss, despite being empty.

Richard White, account executive at DeCotis Insurance in Massachusetts, says one of the biggest problems facing distressed and vacant properties is the amount of time that properties are staying vacant.

“At one time you may have issued a three month or six month policy but now you are blowing through that easily and looking for a 12 month policy,” he said. “The longer the buildings remain vacant the less maintenance they are getting. That’s when it might become a distressed property in an insurance sense.”

White says the long periods of vacancy make it difficult to get coverage because most carriers, including E&S carriers, don’t want to write a building or residence that has been vacant for more than two years. DeCotis, which writes residential and commercial vacant properties mostly in New England, will use other markets than its typical ones at that point, including Seneca, which is one of the few that writes this class on admitted paper.

Insurers expect the number of vacant and distressed properties to continue rising as more foreclosures occur.

Dawn Perri, vice president of Partners Specialty Group in Irvine, Calif., says her office has been very busy keeping up with the new demand for vacant and distressed property coverage.

“We are seeing about five to 10 distressed property submissions a month easily, which is at least a 500 percent increase since last year,” says Perri. “Before the economy tanked, we very rarely would see a vacant property.”

Willis, which recently formed a distressed property practice unit called Distressed Assets Practice, says over $1.4 trillion in commercial real estate loans will need to be refinanced between now and 2014.

“A lot of people, including us, believe there will be a lot of assets changing hands – between all different parties,” says Brian Ruane, executive vice president and National Real Estate and Hotel Practice leader. “These loans have to be refinanced, and the problem is when you have a loan that is coming due and the loan exceeds the asset value, since values have dropped across the country by about 40 percent in the last few years, the borrower has to come up with more equity to refinance. Many borrowers have decided it’s not in their best interest and then it goes to the banks, etc., to come up with a solution.”

Willis saw this situation as an opportunity to launch its new practice and provide all necessary coverages for vacant and distressed properties, including property, liability, environmental insurance, forced place coverage and other insurance for real estate owned (REO) assets, and construction insurance for incomplete projects. The new practice pools the resources of Willis’ real estate and hotel, construction, environmental, executive risks, financial services and mergers & acquisitions practice units to serve these accounts.

“We are looking at a holistic approach to the subject, meaning we have a tight joint venture among our practices and communicate regularly as these opportunities arise,” says Ruane. “Now more than ever we need a coordinated approach among these practices.”

Among the clients that would benefit from this service are property owners, developers, investors, lenders, receivers and special servicers, Ruane says.

Ironshore has taken a similar path and launched a new insurance program called Ironshore Vacancy Assure, which will provide vacant properties with property and environmental coverage. The insurer will only focus on well-maintained, partially or completely vacant commercial properties. Limits for environmental coverage average $1 million to $5 million and can range from $5 to $25 million for property coverage.

The carrier saw a need for this coverage because of requests it was receiving through its environmental division for property coverage on partially vacant buildings.

“Because we were seeing quite a bit of this business, we created a policy that incorporated not only property but pollution as well,” says Tony Mammolite, executive vice president of global property for Ironshore in New York, NY. “It offers property and environmental on one contract.”

Although Ironshore’s policy was just recently released, it has already received a number of inquiries, according to Mammolite. However, he says they are being very selective about the vacant properties they will write, as this class can have many negative exposures.

“We are making sure that we get the type of risk we are looking for, either commercial buildings or commercial locations that are well maintained and have value,” he says. “What you don’t want to do is write insurance on a building that is scheduled to be demolished because there is no value there. We have to make sure of the maintenance of the building and that all of the i’s are dotted and t’s are crossed from an underwriting perspective.”

Perri says one of the advantages of the distressed and vacant property segment is that it has created more opportunity for excess and surplus (E&S) brokers, as most standard markets still do not want to write this class.

“Unfortunately, the E&S market has suffered because the standard markets are eating into the type of business they are writing,” says Perri. “The E&S markets have to look at what’s happening out there and react to trends and better their programs. Vacant property is definitely a trend I don’t see ending anytime soon.”

As a result, Perri says, placing vacant and distressed properties with an E&S market is much easier and the coverages are much broader as E&S markets are trying to recoup their business.

“We are seeing a lot more of this class now and have many more markets to choose from that will do it because they are trying to figure out ways to get new business,” she says. “I haven’t had one issue getting capacity.”

About Amy O'Connor

O'Connor is the Southeast editor for Insurance Journal and associate editor of MyNewMarkets.com. More from Amy O'Connor

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