One of the fallouts of the poor real estate market of the past couple of years is the number of homes that have been on the market for a long time. Many of them have been vacated by owners who have moved on to another home, leaving their vacated home either vacant (little or no furniture or personal property) or unoccupied (no people) for a significantly long time. In some cases now a couple of years or more. This is an insurance problem because, after 60 days of vacancy, the homeowners policy automatically takes away important coverages.
In this article, it's my intent to make you aware of vacancy coverage restrictions in a homeowners policy and how, by using risk management strategies other than insurance, you can help your client avoid those restrictions. In the event you actually have to purchase insurance for a vacant home, I show you how to compare policies and pricing for two major players in that market.
Defining "Vacancy"
A home is "vacant," as defined by the courts, if it does not contain enough furniture for a resident to reasonably live there. So, according to that definition, a home could be considered vacant unless it has kitchen appliances, table and chairs, at least one bed to sleep on, and somewhere to sit (i.e., a couple of living room chairs). If there were no bed or no appliances or no furniture, chances are the homeowners insurer could try to apply vacancy exclusions to the loss. At the very least, a client may have to spend thousands of dollars in attorney fees to contest the insurer's decision.
Vacancy and Homeowners Insurance
There are two problems with a home that is vacant greater than 60 days:
- Vandalism and glass breakage are not covered at all. In fact, newer homeowners forms often exclude any ensuing loss started by vandalism (i.e., vandals burn the house down!).
- Most homeowners insurers won't continue to insure a vacant home. If your policy is canceled or nonrenewed for vacancy reasons, there are only a handful of insurers willing to insure a vacant home. For the customer, either the coverage is very limited but the premium is reasonable, or the coverage is as good as the homeowners policy but the premium cost is 4-5 times greater.
Preventing the Insurance Penalties
The absolute best (and least expensive) strategy for dealing with the homeowners policy vacancy exclusions and restrictions, as well as the risk of your policy being canceled or nonrenewed, is to do what you can to keep enough furniture in your unoccupied home so it doesn't meet the definition of being "vacant." If you're reading this and your home is already without furniture, either rent some furniture or have your realtor "stage" your home with furnishings.
Reducing the Risk of an Unoccupied Home
Even if you succeed at keeping your home fully insured and avoiding the vacancy penalties, you still face increased risks to your home because it's not occupied. A major loss—even one covered by insurance—would be bad news in your efforts to sell your home, further delaying the sale by months. You can reduce your chances of having a major loss from break-ins, fires, smoke damage, and even water damage from frozen pipes by installing a central alarm monitored for burglar and fire/smoke and adding an optional temperature sensor to protect the pipes from freezing. The alarm will also get you a 10-20 percent discount on your homeowners rates.
Another loss reduction strategy is to either rent your home on a month-to-month basis or have a live-in "caretaker" (i.e., a friend or college student who agrees to care for the property in exchange for housing). If neither of these options is feasible, have someone check on your home regularly.
Insuring a Vacant Home
If there is no reasonable way to avoid your home from being vacant, or if you simply would rather pay the insurance premium and not bother getting furniture in there, you generally have two types of insurance companies willing to insure your higher risk, unoccupied, vacant home. One type is specialty companies that cater to more difficult risks. The other type is surplus lines carriers.
Case Study
I recently had a client with a home that had been completely vacant, unoccupied, and for sale for over a year. He had declined my recommendation to eliminate the vacancy by adding furniture to the place temporarily. He was okay accepting the uninsured vandalism and glass breakage risks under his homeowners policy. Then, in February 2009, his homeowners insurer, Auto-Owners, nonrenewed his homeowners policy because of vacancy.
My client had already moved 2,000 miles west and just wanted me to arrange insurance for their home. I found two markets. One was Foremost Insurance Company of Michigan who is actively soliciting and insuring vacant homes. The other was a surplus lines insurer, Mount Vernon Fire, willing to insure this home as a vacant property on a commercial lines property form. The home had an estimated replacement cost of $1 million and an actual cash value of $600,000. Foremost wanted $1,500 for 6 months; Mount Vernon wanted $5,400 for 6 months.
Comparing Policies
It is essential when placing insurance in nontraditional markets that you compare actual policy forms. That is a big part of personal risk management. I did the comparison and here's what I found.
- Foremost offered only actual cash value coverage on the structure. Replacement cost for vacant dwellings is not available through them. Perils covered were limited to fire and extended coverage. If a storm blew through the neighborhood and caused $200,000 damage to the home, the claim check might only be for $120,000 after deduction for depreciation.
- Mount Vernon offered full replacement cost coverage on the structure if the dwelling was insured to 80 percent of the replacement cost. Special perils coverage is also available with no vacancy restrictions at all. In that same $200,000 storm claim, Mount Vernon would pay the full $200,000 claim (if the home was insured for 80 percent or more of replacement cost). Plus, if there was a loss caused by something other than fire or extended coverage (i.e., vandalism), Mount Vernon would cover it. Foremost would not.
My client chose the Mount Vernon option. We agreed it was the best choice in this particular case.
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