ISO's commercial property program undergoes wide-ranging changes - Part 1

Rough Notes, May 1996 by Ketcham, Chris, Kowatch, Diana

Did the ISO commercial property program really change that much? The answer is an emphatic "Yes." Effective in many jurisdictions in early 1996, but using a June of 1995 edition date, ISO revised the existing commercial property program with over 70 changes.

Some of these changes were editorial only, to clarify wording, intent, or to otherwise reformat the coverage forms into a pattern consistent with other ISO products. Some coverages received updates and refreshed limits to coincide with our current economic levels. Other coverages, however, have been impacted significantly.

This two-part article will attempt to review some of the many changes, highlighting the most significant. Note, however, this is not an all-inclusive analysis of every property change made to the program. Time and attention must be spent in careful review and analysis of each of the property changes to fully understand the impact on coverage.

Part 1 will cover the major changes to the building and personal property coverage form and the causes of loss forms.

BUILDING AND PERSONAL PROPERTY COVERAGE FORMS

Vacancy (formerly vacancy and unoccupancy)

The section regarding vacancy has undergone substantial revision with this edition of the property coverage form. Note that the term unoccupancy is no longer a part of the coverage form verbiage.

Definitions are now provided to explain what is meant by the term vacant building when applying to a tenant, building owner, or to property under construction.

Tenant: When the insured is a tenant and covering the insured's interest as a tenant in any covered property, the definition of building is the unit or suite that has been rented or leased to the tenant. That building is considered vacant when it no longer contains enough business personal property to conduct the customary operations of the insured.

Building Owner: When the insured is a building owner, building is defined as the entire building. The building is considered vacant when 70% or more of that building's square footage is not rented or is not used to conduct the customary operations of the insured.

Buildings Under Construction: Buildings that are under construction or renovation are not considered to be vacant.

Whenever a building has been vacant as defined for more than 60 consecutive days prior to the onset of any damage or loss, regardless of whether or not the coverage form has been endorsed to cover any of the following named causes of loss, there is no coverage for the following: vandalism; sprinkler leakage (unless the system has been protected against freezing); building glass breakage; water damage; theft; attempted theft.

For any other covered cause of loss, the amount of payment made by the insurer to the insured will be 15% less than the amount that would have otherwise been paid had the building been occupied.

In the prior version, the definition of vacancy was when the building does not contain enough business personal property to conduct customary operations. Although this was a good concept, it was difficult to adjust. The new version has the same language for a tenant; but for the building owner, it states that when 70% or more of the total square footage of the building is not rented or used to conduct customary operations, it is vacant. What this means is that only 30% need be rented or occupied, but if rented, it does not specify that it must be occupied.

Let us look at where the new changes can affect an insured building owner. First, is an example where coverage would be broadened.

A strip mall is 40% rented with the agreements signed, but the space is not necessarily occupied (because of such things as default, bankruptcy, etc.). In reality, only 10% of the mall is occupied with tenants; but because of the new definition of vacancy, this building would not be considered vacant.

Let's look at a couple of situations where the new wording either restricts, changes, or makes coverage questionable.

In a large, multi-story building with a finished basement and sub-basement, 40% of the floors above the full-length basement and sub-basement are rented. But including the basements, only 10% of the entire building is rented. The limitation applies to the building owner, but not the tenant if he/she is conducting customary operations.

An anchor store of a strip mall declares bankruptcy and breaks the lease. Two other mall stores are still operating, but now only 20% of the building is rented. The owner of the building is affected by the limitation.

A mammoth old building is expensive to heat. Through intelligent re-engineering of the operation, the business is now operating profitably in 25% of the total building square footage. The rest of the building has not been remodeled, as the owner does not know yet whether or not it will be rented or reoccupied should the business expand. Is this building truly vacant?

What is the definition of renovation, and what conditions apply? How active must renovation be?

In the case of a brand new building just completed, if the construction is finished but no tenants have been secured yet, the building is vacant and the limitations apply.