Form CP 04 60: Vacancy Changes
1. What the form is
The CP 04 60 Vacancy Changes endorsement modifies the standard vacancy condition found in Commercial Property policies. Typically, a building is considered vacant if less than 31% of its total square footage is used to conduct customary operations or rented to a tenant for their customary operations. If a building is vacant for more than 60 consecutive days, standard policies often exclude or limit coverage for perils such as vandalism, sprinkler leakage, building glass breakage, water damage, theft, or attempted theft. Additionally, for other covered perils causing loss to a vacant property, the claim payment may be reduced, often by 15%. The CP 04 60 endorsement allows the insured and insurer to agree to a lower percentage of occupancy than the standard 31% before the building is considered vacant, or it may modify other terms related to vacancy. This can be crucial for maintaining adequate coverage when a property doesn't meet the usual occupancy requirements.
2. Classes of business it applies to
This endorsement is relevant for a variety of commercial property owners and tenants who anticipate or are experiencing lower than typical occupancy levels. Examples include:
- Owners of large multi-tenant buildings (e.g., office buildings, shopping malls, industrial parks): These properties may experience periods where a significant portion of leasable space is unoccupied between tenants. For instance, a strip mall owner with only 25% of units leased would normally be considered vacant, but the CP 04 60 could modify this.
- Businesses with seasonal operations: A seasonal resort or a retail store in a summer tourist town might have significantly reduced operations and occupancy during the off-season.
- Properties undergoing partial renovation or redevelopment: If a portion of a building is shut down for an extended period for renovations, but other parts remain operational, this endorsement could clarify the vacancy status. (Note: Buildings entirely under construction or renovation are typically not considered vacant under standard policy terms).
- Building owners in challenging leasing markets: In areas with high commercial vacancy rates, property owners might struggle to meet the 31% occupancy threshold.
- Tenants leasing a large space but only utilizing a portion: While less common, a tenant might lease a large unit but initially only use a small percentage of it. The CP 04 60 could be adapted for tenant-specific vacancy conditions.
This endorsement can be used with various commercial property forms, including the Building and Personal Property Coverage Form (CP 00 10), Condominium Association Coverage Form (CP 00 17), Condominium Commercial Unit-Owners Coverage Form (CP 00 18), the Standard Property Policy (CP 00 99), and the Mortgageholders Errors and Omissions Coverage Form (CP 00 70).
3. Special considerations
- Negotiated Terms: The specific percentage of occupancy or other changes to the vacancy condition are scheduled on the endorsement. This requires a clear agreement between the insurer and the insured.
- Increased Risk: Vacant or partially occupied buildings generally present a higher risk of certain perils like vandalism, theft, and undetected maintenance issues (e.g., water leaks). Insurers will carefully evaluate this increased hazard.
- Not a Substitute for a Vacancy Permit (CP 04 50): If a property is fully vacant for an extended period (beyond the 60 days typically allowed before coverage restrictions apply), a Vacancy Permit (CP 04 50) might be more appropriate. The Vacancy Permit generally allows certain coverages (like vandalism and sprinkler leakage) to continue during a specified period of vacancy, though often for an additional premium. The CP 04 60, on the other hand, redefines what constitutes "vacancy" in the first place.
- Disclosure: It is crucial for insureds to inform their insurer about any changes in occupancy to avoid potential coverage gaps or claim denials.
- State-Specific Rules: While the form is listed as applicable in all states, specific state regulations or interpretations could influence its application or the acceptability of certain vacancy modifications.
- Mortgagee Requirements: Lenders often have specific insurance requirements, and any modification to the vacancy condition should be acceptable to them.
A real-world example: A commercial building owner has a 100,000 sq ft building. Due to a major tenant leaving, only 20,000 sq ft (20%) is currently leased and occupied. Standard policy terms would consider the building vacant. By attaching CP 04 60, the insurer and insured could agree that the building will not be considered vacant as long as, for example, at least 15% of the square footage is occupied, thus preserving broader coverage for the owner while they seek new tenants.
4. Key information for agents and underwriters
- Risk Assessment: Underwriters must carefully assess the reasons for the lower occupancy and the overall risk profile of the property. Factors to consider include:
- Security measures in place (alarms, patrols, lighting).
- Condition and maintenance of the vacant portions.
- Neighborhood environment and crime rates.
- The insured's plans and timeline for increasing occupancy.
- The specific perils being modified (e.g., is vandalism coverage still appropriate with the lower occupancy?).
- Pricing: Modifying the vacancy condition to allow a lower occupancy threshold might warrant an additional premium, reflecting the potentially increased risk exposure for the insurer.
- Coverage Gaps: Agents should clearly explain to insureds how the CP 04 60 modifies the standard vacancy clause and what coverages might still be affected or excluded, even with the endorsement. It's vital to ensure the agreed-upon occupancy percentage is realistic and sustainable for the insured.
- Underwriting Guidelines: Insurers will have their own underwriting guidelines regarding the lowest acceptable occupancy percentage they are willing to consider, even with this endorsement. The ISO Commercial Lines Manual suggests using this endorsement only when a lower occupancy level doesn't present the typical hazards associated with vacancy.
- Documentation: The agreed-upon percentage of occupancy and any other specific changes to the vacancy condition must be clearly documented in the endorsement schedule.
- Alternative Solutions: If the occupancy is extremely low or the building is entirely empty for a prolonged period, a Vacancy Permit (CP 04 50) or a specialized vacant building policy might be more suitable than the CP 04 60. Agents should explore all available options.
- Impact on Other Coverages: Consider how the modified vacancy definition might interact with other policy provisions or endorsements.
For example, an underwriter reviewing an application with a CP 04 60 requesting a 20% occupancy threshold for a large warehouse district building would need to assess the security for the vacant 80%, the condition of that unused space, and the owner's efforts to lease it. They might approve the endorsement but with a premium surcharge or specific warranties regarding maintenance and security of the unoccupied areas.