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Active occupancy: elucidating the vacancy exclusion.


When driving past a motel sign with the word "vacancy" illuminated in neon, most people understand that there is indeed room available at the inn. How long the room has been vacant generally is not a concern. This is not the case in insurance contracts. When the word "vacancy" is spotted on an insurance policy, things get a little more complicated.

"Vacant" or "Unoccupied"?

Courts have long defined "vacant" in insurance policies as meaning empty of inanimate objects--as opposed to "unoccupied," which they have defined as being void of human habitation. For example, in Myers v. Merrimack Mut. Fire Ins. Co., 788 F.2d 468 (7th Cir. 1986), an apartment building was deemed "vacant" and not merely "unoccupied" in regard to a fire loss. The court found that the loss was excluded where apartments in a building, except for some stoves and refrigerators, were entirely empty for approximately 18 months, lacking both tenants and inanimate objects.

The number of days a building or a residence remains vacant can also affect coverage. Some forms have specific requirements as to how much of a building must be occupied so it is not considered vacant. Many policies contain provisions stating that perils such as vandalism and theft are not covered if a building is vacant for more than a certain number of days.

Of course, these insurance-specific stipulations have led questioning FC&S subscribers to seek our advice.

One area that conjures up questions about the meaning of "vacancy" stems from insureds with seasonal businesses. For instance, insureds with motels, restaurants, and shops along the Maine coastline may close their businesses during the off season. Contents, such as equipment, furniture, and other personal property can stay, but all perishables are removed. Properties are winterized by draining pipes and shutting off water and heat.

Carriers know these properties are seasonal and accept the risks. Therefore, in the event of a loss, would these property types be deemed vacant by the policy language on a commercial property policy?

The Insurance Services Office (ISO) CP 00 10, Building and Personal Property Coverage Form states that a building is vacant unless 31 percent of its square footage is used by the building owner to conduct customary operations. As the customary operations of seasonal businesses are to rent rooms and service customers, and those customary operations are not being performed in the months they are closed, the buildings would meet the definition of "vacant" set out in the policy, and those provisions would apply.

Another vacancy problem that can arise is when an insured buys a building that has been vacant for longer than the time period specified in the policy's vacancy provision.

Exercise Common Sense

One FC&S subscriber spoke of an insured who owns and insures several commercial properties that he uses in his business. The insured recently purchased an additional building, which reportedly had been vacant for more than 60 days. Shortly after closing on the building, a theft occurred.

The insured would not have had an opportunity to move any equipment or personal property into the building during the short period between the property's closing and when the theft occurred. The day of the closing, the insured and his shop manager walked the building and discussed what doors needed to be rekeyed and saw that the wiring and compressor--the stolen property--were there when they left the building that afternoon.

The carrier denied the insured's claim solely because of the vacancy provision of the Building and Personal Property Coverage Form, which states that buildings that are vacant more than sixty days are not covered for theft losses. The subscriber did not feel that the provision applied because the insured had just purchased and insured the building.

We agree. The building was not vacant for more than 60 days after the inception of this policy or under the insured's ownership.

Turning to Couch on Insurance, we find that "if an insurance company has knowledge through its agent, when a contract of insurance is effected, that the premises are vacant or unoccupied, then the issuance of the policy waives any provision as to vacancy or unoccupancy, at least as far as the existing vacancy is concerned."

Looking past the insured's vantage point, can a building that is clearly vacant be considered otherwise from another party's perspective?

Foreclosure Considerations

Let's consider a mortgagee that foreclosed on a dwelling. After the insureds moved out, the home was vandalized. The home had been vacant for more than 30 days prior to the loss. Would the mortgagee have any coverage under a homeowners' policy on which it is a payee?

In order for the insurer to respond to a valid claim, the mortgagee must carry out three conditions. The mortgagee must:

* Notify the insurer of any change in ownership, occupancy, or substantial change in risk of which the mortgagee is aware.

* Pay any premium due on demand if the mortgagee has neglected to pay the premium.

* Submit a signed, sworn statement of loss within 60 days after receiving notice from the insurer that no statement has been received.

The policy precludes coverage for vandalism if the dwelling has been vacant for more than 30 consecutive days immediately before the loss. Does this exclusion also then apply to the mortgagee's claim?

Many courts are of the opinion that the mortgagee clause operates as a separate contract with the mortgage holder, such as the court in Travers v. Universal Fire & Casualty Insurance, 34 S.W.3d 156 (Mo. Ct. App. 2000), which stated that because the "mortgage clause is an independent contract between the mortgagee and the insurance company, the mortgagee is protected against loss from any act or neglect of the mortgagor or owner, so that it shall not defeat the insurance so far as the interest of the mortgagee is concerned."

Since the act or neglect on the part of the insured was to leave the premises vacant, this act should not preclude coverage for the mortgagee. The mortgagee submitted the appropriate statement of loss and notified the insurer as soon as it learned the insured had vacated the property. A notice of foreclosure does not necessarily mean the premises are immediately vacated. In addition, the foreclosure does not constitute a change in ownership. Thus, while the property was technically vacant by definition, from the mortgagee's standpoint, coverage applied because it was not the mortgagee that left the property vacant, but the insured that did so.

When considering where to spend the night, a vacancy sign is a welcome sight. In the world of insurance, however, vacancy often brings questions and headaches for the insured.


Introduced in 1985 as part of the development of simplified language insurance policies, the ISO Building and Personal Property Coverage Form has undergone several revisions. To date, there have been eight editions. The form edition date is the last two sets of digits in the form number. For example, the first edition of the policy was issued as the CP 00 10 07 88 edition, meaning it was released for use in July 1988. It currently exists--where approved--as the CP 00 10 06 07 version. A historical tracing of the edition dates is relevant because insurance litigation frequently involves loss under previous forms.

Source: FC&S Online

Susan Massmann, CPCU, is an assistant editor for FC&S. She may be reached at
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Copyright 2010 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Claim Queue
Author:Massmann, Susan
Date:Jan 1, 2010
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