Vacancy/Occupancy Clauses in Property Insurance

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The AAIS endorsement (CP 0614 12 99) contains a schedule that identifies the kind of protective device or service and its location, i.e., premises and building number. It contains a section relating specifically to devices or services providing fire protection, and a section relating to devices or services providing theft protection.

Nonstandard endorsements also are available. One such endorsement includes protective safeguards related to an automatic extinguishing system and hood and duct cleaning, and a UL-approved spray paint booth, as well as the more common automatic sprinkler systems and fire and burglar alarms. Nonstandard endorsements may vary according to the commercial enterprise insured.

It needs to be emphasized that these endorsements make it a condition of insurance that the insured is required to maintain the protective devices or services listed in the schedule. The ISO endorsement states that the insurer will not pay for loss caused by or resulting from fire if, prior to the fire, the insured: (1) knew of any suspension or impairment of any protective safeguards device listed and failed to notify the insurer; or (2) failed to maintain any protective device over which it had control in complete working order. In either case, the insurer can deny coverage for the loss. The AAIS endorsement reads essentially the same.

As noted earlier, the endorsements impose a critical responsibility on the insured to ensure that these devices or services are operational and maintained on a continuous basis. Thus, the insured has a duty to notify the insurer if the insured knows of any suspension or impairment of any such device or service, and a duty to maintain the device or service, over which the insured has control, in complete working order. Generally speaking, the wording of these endorsements is quite clear and there is little room for ambiguity.

There is, however, a reprieve of sorts for the insured in both the AAIS and ISO endorsements which indicates that if part of an automatic sprinkler system is shut off and the insured restores full protection within 48 hours, the insured need not notify the insurer. Note that the reprieve is limited. It applies only to the notice requirement for sprinkler systems, and only if part of the system, rather than the entire system, is affected.

Considerations for the Insured

In view of the substantial responsibility such an endorsement imposes on an insured, one might ask why not simply avoid or reject such an endorsement and eliminate the risk that an inoperable safeguard device could lead to a denial of coverage? Good question! An important consideration for an insured is whether the discount offered by an insurer is worth the potential risk that a claim for a fire or theft loss may be denied if, for some reason, the particular safeguard device does not operate properly. That is, of course, if the insured has the option of rejecting the endorsement. Rejecting the endorsement may not be an option with some insurers, when the insured has in place protective safeguard devices. Furthermore, an insurer may be unwilling to insure a particular property without safeguard devices. In some cases, property that ordinarily might not be insurable may qualify for insurance with the installation of protective safeguard devices.

In some cases, property that ordinarily might not be insurable may qualify for insurance with the installation of protective safeguard devices.


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