Mixing Up Occupancy for Commercial and Residential Properties

By Patrick Wraight | January 4, 2019

There is a trend in residential construction to build condominium communities that go beyond the traditional amenities we’re used to. We are accustomed to work out rooms, pools, game rooms and the like in communities. What we see today also includes space set aside for retail, business, cafes and restaurants.

When we insure a building, we want to know a few details, such as how the building was built (construction), what’s going on in the building (occupancy), how the building is protected from fire (protection) and what is going on around the building (exposure). These four elements make up the key details of property underwriting. While the 30th floor restaurant, 1st floor gift shop and 2nd floor office space might be convenient for residents, they muddy the underwriting and policy issuance for the building.

If it is a strictly residential condominium, the underwriting is simple. How many units? How many units are currently occupied? How many units are for sale? What’s the average time a unit is listed before it’s sold? Once we mix the occupancy between residential and commercial, we introduce unknown quantities to the underwriting. How many units are used for residential purposes and how many are used for commercial? Of the residential units, how many are used for short-term rentals? Where are the commercial units located in the building? What are the commercial occupancies? Is there a restaurant? Does the association run the restaurant, or is it operated by an individual unit owner?

Mixed Occupancies

Let’s consider two possible occupancies: a themed bar and a restaurant. These two occupancies, while different, have similarities. It is those similarities we need to key in on and consider how their unit policies might be amended to account for the exposures related to them. The biggest similarity is they both cook and serve food. The bar may not be serving food at the level the restaurant is, but with a themed bar, you may have some light fare.

Condominium associations, whether residential or commercial, find coverage on the ISO CP 00 17 (Condominium Association Coverage Form). It doesn’t matter if the condominium is purely residential, purely commercial, or any mix of both. That form doesn’t speak to that. Residential unit owners will find coverage on the ISO HO 00 06 (Homeowners 6 – Unit Owners’ Form). Commercial unit owners find coverage on the ISO CP 00 18 (Condominium Commercial Unit-Owners Coverage Form). That was the simple part of this.

Let us consider that the restaurant owner may own the unit the restaurant is in. A restaurant, or sports bar serving food, has increased risk of fire because of a kitchen. How might an underwriter handle this increased risk of loss due to fire? What gets difficult is that it is possible, even likely, the unit owner and the association have gone to two different agents who are working with two different insurers. Even if both submissions go to the same insurer, there is no reason to believe both submissions will end up with the same underwriter. These factors make it difficult to know what will happen. Here’s one solution.

The association policy should be amended to include a powerful endorsement, CP 04 11 (Protective Safeguards), or an alternative that works in a similar way. In this example, we are looking at CP 04 11 10 12 (Protective Safeguards). Many underwriters will require a building have a sprinkler system, monitored alarm systems, or other protective system. This endorsement makes that requirement part of the policy. It allows the underwriter to select the safeguards she believes will best protect the building. In our case, she selected the following.

  • “P-1” Automatic Sprinkler System, including related supervisory services.
  • “P-2” Automatic Fire Alarm, protecting the entire building.

Before we move into the rest of the form, we should look at the restaurant unit owner and the policy his underwriter is considering. This underwriter is adding endorsement CP 04 11 10 12 to the unit owners’ policy. He is also requiring safeguards for the restaurant risk.

  • “P-5” Automatic Commercial Cooking Exhaust and Extinguishing System installed on cooking appliances and having the following components: hood; grease removal device; duct system; and wet chemical fire extinguishing equipment.

When you mix residential and commercial occupancies, you increase the risk, and that increased risk will need to be dealt with.

Two policies that both include the identical form, except each form creates different requirements. The rest of the form creates the reason the underwriters both chose to add to their customers’ policies.

We will not pay for loss or damage caused by or resulting from fire if, prior to the fire, you:

1. Knew of any suspension or impairment in any safeguard listed in the schedule above and failed to notify us of that fact; or

2. Failed to maintain any protective safeguard listed in the schedule above, and over which you had control, in complete working order.

If part of an Automatic Sprinkler System or Automatic Commercial Cooking Exhaust and Extinguishing System is shut off due to breakage, leakage, freezing conditions or opening of sprinkler heads, notification to us will not be necessary if you can restore full protection within 48 hours.

Now consider the requirement that has just been laid upon these two customers. Both are compelled to maintain their required protective safeguards because if they do not, and a fire breaks out, there will be no coverage for that fire. The largest risk to the building and the unit becomes excluded from the insurance policy.

When you mix residential and commercial occupancies, you increase the risk, and that increased risk will need to be dealt with. Other issues can come up with mixed occupancies: uninsured units, business liability issues, short-term rentals, and more.

About Patrick Wraight

Patrick Wraight, CIC, CRM, AU, is director of Insurance Journal's Academy of Insurance. He can be reached at pwraight@ijacademy.com.

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