Insurance Vacancy Clause: Tennessee Property Coverage Limitation

According to ATTOM Data Solutions, a property database curator, Tennessee is currently tied for the highest overall vacancy rates for all residential properties for the first quarter of 2021.¹ This number is sure to increase should the currently moratorium on evictions expire on March 31, 2021, as per the present CDC and Department of Health Order.² However, landlords and policyholders should be aware that leaving their property vacant for too long can result in limitation in insurance coverage.

Most insurance policies, both residential and commercial, have a vacancy clause that provides, in part, that losses caused by theft, vandalism, or water damage are not covered if the premises have been “vacant” or “unoccupied” for a set amount of time. Further, coverage for other losses, such as fire or windstorm, is reduced by 15%. In the most recent case on the issue, Johnson & Associates v. Hanover Insurance Group, the Tennessee Court of Appeals noted that “[t]he purpose of vacancy clauses is ‘to avoid liability where the risk has been increased by vacancy.”³

Vacancy determinations are defined in the policy and usually require 60 consecutive days of absence before the date of loss. Occupancy concerns generally arise in commercial policies and are typically defined as the suspension of customary operations regardless of the presence of any business personal property. In Johnson & Associates, the vacancy term was defined as when a specific percentage (31%) square footage of the building was no longer being used for customary operations.⁴ As policies vary, policyholders should be aware of the specific language in their policy.

Interestingly, Tennessee courts have ruled that vacancy clauses “are to be construed in the light of conditions existing when the policy is issued.”⁵ And, a vacancy limitation is complied with “if the property insured is put to the use contemplated by the parties, as expressed in the contract of insurance.”⁶ Therefore, if a policyholder’s rental property is vacant and the insurance company knew that that fact at the time when the insurance policy was issued, the policy covers the property, and the vacancy clause is waived.⁷

What if the property is now within this vacancy limitation, i.e., past the 60 days described in most policies? In Tennessee, this merely operates as a suspension of the coverage, which may be revived with a subsequent occupancy within the policy period.⁸ In other words, the policy remains valid but inactive until occupancy is reestablished, which then triggers full coverage during the initial policy tenure.

Business owners and landlords need to be cognizant of the policy terms needed for their specific purposes when it comes to potential vacancy concerns. Permission endorsements are also available. However, these options often offer reduced coverage, such as including actual cash value or limited perils coverage.⁹ Though matters relating to this vacancy limitation are nothing new, they are becoming more frequent issues.
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¹ Vacant Zombie Properties Remain Miniscule Factor in U.S. Housing Market Amid Ongoing Foreclosure Moratorium, ATTOM DATA SOLUTIONS (Feb. 25, 2021), https://www.attomdata.com/news/market-trends/attom-data-solutions-q1-2021-vacant-property-and-zombie-foreclosure-report/
² CDC and Dept. of Health Order for the Temporary Halt on Residential Evictions to Prevent the Further Spread of COVID-19 (Jan. 29, 2021), https://www.tn.gov/content/dam/tn/health/documents/healthy-places/healthy-homes/CDC-Eviction-Moratorium-01292021.pdf
³ Johnson & Associates, LLC v. Hanover Ins. Group, Inc., 572 S.W.3d 636, 642 (Tenn. Ct. App. 2018), quoting Providence Washington Ins. Co. v. Stanley, 403 F.2d 844, 849 (5th Cir. 1968); Couch on Ins. § 94:102.
⁴ Id. at 639.
⁵ Id., quoting Couch on Ins. § 94:110.
⁶ Id. at 642-43, quoting Winston-Salem Fire Fighters Club, Inc. v. State Farm Fire & Cas. Co., 131 S.E.2d 430, 434 (1963).
⁷ Couch on Ins. § 94:151; McCaleb v. American Ins. Co., 325 S.W.2d 274, 277 (1959).
⁸ Carolina Ins. Co. of Wilmington, N.C. v. St. Charles, 98 S.W.2d 1088, 1092 (Tenn. Ct. App. 1936).
⁹ Nicole Yarbrough. Understanding – And Avoiding – the Vacancy Clause. Independent Agent (November 2012), https://rms.iiaba.net/Resources/Pages/Publications/Angles/2012/11-12-EO-Angle.pdf.