Implications of unoccupied premises for property owners

There are many reasons why properties are left unoccupied and lack of tenant demand for properties due to COVID-19 has exacerbated the issue for property insurers. The last two years has seen a huge shift to ‘the new normal’ which includes work from home and other flexible working arrangements. In most cases, businesses have implemented either 100% work from home or a hybrid option involving working between the office and home. This shift has allowed workers a better work-life balance, however, there is now less demand for office space and retail and hospitality outlets, causing an increase in the number of unoccupied premises across Australia.

Implications from an insurance perspective

It is important for property owners to understand the implications of their properties being unoccupied from an insurance perspective. Unoccupied premises are considered higher risk as they are vulnerable to theft, fire, malicious damage, illegal dumping of items, trespassers, and squatters. Not only is there an increased risk of a loss occurring, because there is nobody on site to respond when an event does occurs, it is more likely that any damage will be more severe than if there were occupants onsite with their own control and response measures.

With regard to fire, where there is already a high risk due to construction materials, remoteness, and age of the premises, it is even more likely that insurers will impose special conditions in respect of unoccupied premises.

Insurer claims statistics show that the average claim increases in value by 350% for vacant properties and it is therefore understandable that insurers seek to impose harsh conditions in respect of unoccupied premises.

Insurers may respond with a range of measures in circumstances where premises are left unoccupied, including:
  1. Refusal to insure the premises altogether or decline a claim where damage occurs during the period of vacancy.

  2. Set time frames on how long the property may remain unoccupied before cover is voided. Some policies may have a 90 – 120 days unoccupied policy condition, rendering the cover invalid if the premises were to remain unoccupied for any longer.

  3. Charging higher premium rates whilst the premises are unoccupied due to the higher risk of damage.

  4. Imposing increased claims deductibles whilst premises are unoccupied.

  5. Imposing special conditions that cover is contingent upon. For example, an insurer may require an owner of unoccupied premises to install certain types of security measures such as security patrols, CCTV cameras and fire and burglar alarms. Alternatively, they may require a property owner’s real estate agent to check in on the premises at certain intervals.

Disclosure requirements

Policyholders have duties at common law and under the Insurance Contracts Act 1984 to disclose circumstances that may have a material impact to the risk rating of their properties.  This means that property owners must tell their insurer as soon as reasonably practicable upon becoming aware that a tenant is vacating the premises and, in the case of new acquisitions, the purchaser must let their insurer know the nature of the tenants in the premises or if the building will be vacant.

It is therefore recommended that policyholders maintain an open, running dialogue with their broker or insurer regarding any period premises are expected to be unoccupied.  Insurers may want to know whether a property is being actively advertised for lease or sale and how long the property agent expects the premises to remain vacant or on the market.

Reducing the risks of unoccupied premises

To reduce the risk that comes with an unoccupied property and to help ensure continued coverage is maintained, you should inform your broker or insurer that the premises will be vacant. They will be able to notify you of what the next steps are and how the unoccupied status may affect your policy or premium.

In the event of a loss, policyholders are almost always told by their insurer that, until indemnity is officially granted under the terms and conditions of the policy, they should act as a prudent uninsured.

A “Prudent Uninsured” is a legal concept which simply means that the Policyholder should act as if they do not have insurance.

To elaborate, just because you may have an insurance policy in force to cover you for loss or damage, this does not mean you can be reckless or act with flagrant disregard to the potential risk. As is the case in all classes of insurance, it means that reasonable measures and precautions need to be undertaken to minimise and safeguard against the risk of further harm and/or loss or damage.

In other words, what would a property owner do to protect its assets if they weren’t insured?  Whilst property owners can wait to see what conditions and requirements their insurer imposes in respect of unoccupied premises, owners should consider being proactive in implementing the same types of risk control measures that insurers would like to see put in place, such as additional security and fire controls whilst the premises are unoccupied.

In addition to maximising the security of valuable assets, insurers look favourably upon policyholders that take a proactive approach to risk management and this can result in more readily available and affordable insurance.

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