COVID-19 – Unoccupied business premises and insurance implications
2nd April 2020
Much of the recent press coverage relating to COVID-19 and commercial insurance has focused on entitlement to business interruption coverage as a result of forced closure. This coverage will undoubtedly be of vital importance to many businesses as they look to recoup inevitable losses. The focus, however, should also be on the insurance implications of unoccupied premises as a means to prevent unnecessary losses.
As a starting point, it is industry standard for insurance coverage of commercial premises to be restricted after a period of 30 days of remaining unoccupied. Coverage is often restricted to so-called ‘FLEA’ risks (Fire, Lightning, Earthquake and Aircraft). As a result, such common risks as theft, flood and malicious damage will be excluded. In simple terms, the majority of business premises may not be covered for these risk exposures on the 31st day after closure. This should be an area of concern as this is often seen as a boiler-plate clause in insurance policy wordings across the vast majority of sectors ranging from retail, hospitality, manufacturing, property owners and also offices. Given that many premises have now been unoccupied for ten days, business owners should be considering the potential insurance implications of unoccupied property as a matter of urgency. As a first step, they should check their insurance policy conditions to find out the minimum occupancy requirements for the premises, both as to length of permitted non-occupation and the types of occupation that qualify as occupancy under the policy – e.g. does an hour long visit to the premises once every seven days count as occupancy. It is far better to retain cover under the existing policy than have to explore obtaining FLEA insurance cover. Not only does this avoid the hassle of arranging new insurance but the premium for so-called FLEA unoccupied premises insurance is typically far higher than a premium for occupied premises. A FLEA insurance policy premium is also often for a minimum period of 12 months and non-refundable.
Looking beyond 30 days of unoccupied property, policyholders should make themselves fully aware of the additional security obligations that they are bound by within their policy wordings. These obligations usually include turning off and draining of the mains water, regular recorded visitation of premises and ensuring alarm systems remain fully operational. If these obligations are not fulfilled and a claim is made, the insurer may be within their right to void the policy and deny the claim. It should be underlined that a claim may potentially be declined even if the circumstances of the claim are not connected to the stated obligations within the insurance policy wordings.
What can you do as a business owner?
It would be prudent at this time for commercial businesses to notify in writing their Brokers/Insurers of the enforced changes to their business activities and risk exposures
Tenants of commercial premises should also consider contacting their landlords to tell them that the premises are unoccupied. Since landlords under most commercial leases are responsible for insuring the premises, they will need to alert their insurer to the premises not being occupied, in order to avoid voiding the policy and to request amendment of the insurance cover. Whilst most landlords will be unsurprised to learn of the premises being unoccupied as a consequence of COVID-19, care should still be taken in approaching them. Tenants should check their lease terms, as many leases require them to remain in occupation of the premises (even if not to keep the premises open to the public) and word their notification to the landlords with due care.
Businesses should also seek clarity on any automatic restriction of coverage as a result of property being unoccupied. This discussion should clarify any imposed restrictions to your coverage, and should also allow you to discuss suggested ways in which coverage could continue to operate fully as usual. Your insurers may ask you to introduce further risk management controls to mitigate the effects of perceived additional risk exposures in return for maintaining comprehensive coverage. For example, you may have to check the property more regularly in order to maintain theft and malicious damage coverage. Secondly, confirm your unoccupied property obligations with your insurer and ensure you remain fully compliant with the obligations as defined within your insurance policy wordings.
Something else which landlords need to be aware of is the risk of squatters taking up occupation in closed or unoccupied properties. Please see here for some advice in relation to that: https://www.wjm.co.uk/news/removing-squatters-during-the-pandemic
Understandably, insurance coverage may not be a priority for businesses at the moment. However, it is vital that business owners and tenants are fully aware of the extent that their premises are covered under their insurance policy during periods of premises being unoccupied to avoid the refusal of intimated claims.
The information contained in this newsletter is for general guidance only and represents our understanding of relevant law and practice as at April 2020. Wright, Johnston & Mackenzie LLP cannot be held responsible for any action taken or not taken in reliance upon the contents. Specific advice should be taken on any individual matter. Transmissions to or from our email system and calls to or from our offices may be monitored and/or recorded for regulatory purposes. Authorised and regulated by the Financial Conduct Authority. Registered office: 302 St Vincent Street, Glasgow, G2 5RZ. A limited liability partnership registered in Scotland, number SO 300336.