Insurance Alert: Commercial Landlords & Fire Policies: Increase in Hazard
Although the article takes as its focus student off-campus housing, the article has general observations for any commercial landlord that is contemplating (or has) a possible change in use/occupancy on its property.
First, underwriters of fire insurance policies use the concept of the “increase in hazard” to limit coverage. Generally, the concept means that where there is an increase in hazard to insured property in the knowledge or control of the insured, coverage will be suspended. If a loss occurs while coverage is suspended, the coverage may be denied. If the hazard is cured, a loss after the reinstatement is covered. An increase in hazard will generally not be found if there has been merely a casual or temporary change in character of the premises. Likewise, an insured’s negligence is not an increase in the hazard, unless it results in a change to the property, use, or occupancy.
Secondly, according to courts, all of the following constitute an increase in hazard sufficient to suspend or to deny coverage: intentionally disabling fire-sprinklers, smoke or fire alarms; change in number of bedrooms; failure to remove debris; storage of explosive materials, including alcohol; converting a single-family dwelling to a boarding or rooming house. Basically, any change that affects the safety and security of property is a candidate for an increase in hazard trigger.
Moreover, an increase in hazard need not give rise to the loss for the insurer to deny coverage. In these cases, all that is required for the increase in hazard clause to apply is that there was an “increased hazard by a means within the knowledge and under the control of the insured.” Although the caselaw is limited, this is extremely broad wording and seems to put a landlord on inquiry notice.
Thirdly, a “moral hazard” can also be an increase in hazard. A “moral hazard” refers to the effect of insurance in causing the insured to relax the care to safeguard property because loss will be borne by insurance. So the increase in hazard provision may be triggered where a cash-strapped landlord that, without due diligence or in the face of red-flags, rents to a tenant that could be a serious threat to the subject property. Without a physical change to the property or its use, however, it is not likely that a “moral hazard” alone would constitute an increase in hazard.
Finally, it is important to remember that with virtually any change in use/occupancy comes additional stresses to the property that could change its condition — like the amount of debris or clutter, or over-taxing electrical systems, other elements of infrastructure or construction. These factors could be fire hazards that need not even lead to a loss to jeopardize coverage. If these factors existed before coverage bound, the carrier may rely on rescission if the conditions were not disclosed or were inadequately disclosed in the application. But where the change arises later, the increase in hazard clause may be implicated.
In short, the thing to note here is that the change in use/occupancy can happen very easily – not to mention surreptitiously – and possibly imperil coverage.
In the context of off-campus housing, there is a convergence of conditions – lack of adequate housing, increasing demand for same, huge purchase costs for landlords, and the potential to recoup purchase costs through high rents charged to students who are willing to live crowded into almost any conditions – that raise the risks for an increase in hazard. The lessons are clear. Carriers cannot rely on building inspections of the properties they insure. They cannot rely on landlords in these circumstances to do the ‘right thing’. The off-campus housing situation in the U.S. creates a unique mix of factors that challenge property underwriters like never before. They may make inevitable an increase in hazard.