The vacant and distressed property segment has been a beacon of light for insurers and brokers as the economy has forced the closure of businesses and halted construction projects, resulting in a number of vacant buildings across the country.
The industry expects that demands for the coverage will continue and even increase.
Distressed and vacant properties include buildings or residences that have been abandoned because of the tenants being unable to pay their lease or mortgage. This can also include an office park where some buildings are still occupied but others are not, or construction projects started and then abandoned because the financing dried up.
Vacant buildings are targets for thieves who steal copper wiring or other materials. They are also susceptible to electrical malfunctions or frozen pipes. Vacancies also pose a risk and financial burden to the owners or banks that still own the property.
Richard White, account executive at DeCotis Insurance in Massachusetts, says one of the biggest problems can be the amount of time that properties are staying vacant.
“At one time you may have issued a three month or six month policy but now you are blowing through that easily and looking for a 12 month policy,” he said. “The longer the buildings remain vacant the less maintenance they are getting. That’s when it might become a distressed property in an insurance sense.”
White says the long periods of vacancy make it difficult to get coverage because most carriers, including excess and surplus (E&S) carriers, don’t want to write a building or residence that has been vacant for more than two years. DeCotis, which writes residential and commercial vacant properties mostly in New England, will use other markets than its typical ones at that point, including Seneca, which is one of the few that writes this class on admitted paper.
Dawn Perri, vice president of Partners Specialty Group in Irvine, Calif., says her office has been very busy keeping up with the new demand. “We are seeing about five to 10 distressed property submissions a month easily, which is at least a 500 percent increase since last year,” says Perri. “Before the economy tanked, we very rarely would see a vacant property.”
Willis, which recently formed a distressed property practice unit called Distressed Assets Practice, says over $1.4 trillion in commercial real estate loans will need to be refinanced between now and 2014.
“A lot of people, including us, believe there will be a lot of assets changing hands – between all different parties,” says Brian Ruane, executive vice president and National Real Estate and Hotel Practice leader. “These loans have to be refinanced, and the problem is when you have a loan that is coming due and the loan exceeds the asset value, since values have dropped across the country by about 40 percent in the last few years, the borrower has to come up with more equity to refinance. Many borrowers have decided it’s not in their best interest and then it goes to the banks, etc., to come up with a solution.”
New Willis Practice
Willis saw this situation as an opportunity to launch its new practice and provide all necessary coverages for vacant and distressed properties, including property, liability, environmental insurance, forced place coverage and other insurance for real estate owned (REO) assets, and construction insurance for incomplete projects. The new practice pools the resources of Willis’ real estate and hotel, construction, environmental, executive risks, financial services and mergers and acquisitions practice units to serve these accounts.
“We are looking at a holistic approach to the subject, meaning we have a tight joint venture among our practices and communicate regularly as these opportunities arise,” says Ruane. “Now more than ever we need a coordinated approach among these practices.”
Among the clients that might benefit from this service are property owners, developers, investors, lenders, receivers and special servicers.
Ironshore has taken a similar path with a new program called Ironshore Vacancy Assure, which offers vacant properties property and environmental coverage. The insurer will only focus on well-maintained, partially or completely vacant commercial properties. Limits for environmental coverage average $1 million to $5 million; from $5 to $25 million for property coverage.
Tony Mammolite, executive vice president of global property for Ironshore in New York, says the policy meets a need to combine property and environmental on one contract. He says Ironshore is being very selective about the vacant properties, as this class can have many negative exposures.
Perri says the distressed and vacant property segment has created more opportunity for excess and surplus (E&S) brokers, as most standard markets still do not want to write this class.
“We are seeing a lot more of this class now and have many more markets to choose from that will do it because they are trying to figure out ways to get new business,” she says. “I haven’t had one issue getting capacity.”
Topics Agencies Excess Surplus Property Property Casualty Pollution Construction
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