Expert Update | Insurance: Vacancy Period

Expert Update | Insurance: Vacancy Period

With the increase in unoccupied commercial premises this year as a result of Covid-19, Colin Donnellon, Development Director at CLEAR MPW Insurance Brokers, part of the Clear Group, explains what implications conversion into residential buildings could have.

When lockdown came into force this March, the majority of the UK’s commercial properties immediately became unoccupied. This created significant difficulties for businesses and a hurried review of insurance policy conditions by insurers.

Insurers apply specific clauses within their policy wordings, commonly referred to as unoccupancy clauses or conditions and when a property becomes vacant and remains so for an extended period – usually 30 consecutive days or more. It is also likely that cover will be restricted after the initial period. During these unprecedented times it would have been extremely unfair of insurers to apply these same conditions to all property owners as a result of the Government’s lockdown. Consequently, insurers extended the standard period after which, such clauses would apply from 30 days to 90 days, and in some cases for a more extended period.

Unfortunately, these unprecedented times have had a devasting effect on business and many firms continue to make huge changes to their work force as they restructure to deal with the effects of the crisis. A number of household names have already been unable to survive during lockdown or the resultant period of easing.

Prior to lockdown, the retail presence on our high streets had been slowly reducing, but with the recent acceleration of store closures we are now seeing many more properties remaining permanently unoccupied.

Additionally, other commercial premises typically occupied as offices, have met with a similar fate. Many tenants are now reviewing their need for city addresses often with an expensive rental cost. With work from home the new normal, there is now a tendency for offices to look to desk sharing and splitting the working week between home and office, ultimately reducing the amount of office space required.

Moving forward, vacant premises will be more expensive to insure often exacerbated by the likelihood of reduced cover and unoccupied policy conditions to fulfil.

What does the future behold for Property Owners and Investors?
Given the changing landscape, commercial properties now seemingly offer a far less attractive investment opportunity than before. This in turn is likely to create a shift in commercial to residential conversions. The Government has already recognised the importance of this change with recently announced radical reforms to the planning laws to boost construction. They recently launched a new Class ZA Permitted Development Right, allowing developers to demolish unused commercial premises and build residential units. The benefit of this scheme is that it restricts the powers of local councils to prevent developments going ahead and expedites property conversions.

Historically we have seen considerable numbers of commercial properties converted to residential apartments and with the Permitted Development scheme now in place, this is likely to accelerate further. These properties tend to have good access to amenities and transportation. With this likely transformation, our high streets and commercial centres may take on a more residential look and feel.

If you are planning to convert unoccupied commercial properties into residential accommodations you should speak to your insurance broker from the outset, there are project insurance policies available.

Single Project Insurance
Single project insurance programs are an increasingly popular risk management technique used by property owners, developers and contractors for construction projects to reduce total construction costs whilst controlling the scope of risks to be insured.
This type of policy typically consolidates insurance coverage for main contractors and subcontractors working on a project into one program negotiated, purchased and managed by a single sponsor. That sponsor can either be the owner or developer (owner-developer controlled insurance program) or the contractor (contractor controlled insurance program).

Construction project arrangements may include insurance of the works, public liability insurance, excess liability insurance, 6.5.1 type non-negligence insurance, existing structures buildings insurance, advanced loss of rent/ additional cost of interest business interruption cover, professional indemnity insurance, environmental impairment insurance and buildings defects insurance.

If you are engaging with a specialist construction insurance broker, they should be able to review your building contract provisions to ensure the correct JCT provisions are put in place to protect your assets and upcoming works. They can also ensure that the proposed provisions can be fulfilled to avoid a breach of contract. Furthermore, depending on the complexity of the construction works programme, there may be various types of insurance cover required throughout, and at different phases, of the building project.

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