Squatting Risks and Property Owners
As state legislatures consider new laws to protect property owners from squatters, insurance professionals are highlighting the significant financial dangers squatting poses, including legal expenses, lost rental income, and potential property damage.
Commercial property insurance policies provide coverage for physical damage resulting from vandalism and fire; however, this coverage may be limited for vacant properties. This risk has led to a wave of legislative efforts across numerous states. These actions, following the enactment of laws in states like Florida and New York, aim to provide property owners with faster legal procedures to address squatter issues, and some propose criminal charges for squatting.
Duncan Ellis, the U.S. and Canadian real estate and hospitality industry practice leader at Marsh LLC, indicates that the issue of squatting is often overlooked by property managers and insurers. Squatters can include tenants who default on rent and then refuse to leave a property, or individuals who occupy vacant buildings and establish residency. The problem worsened during the pandemic when eviction regulations were relaxed.
“You can’t toss someone out of a building. You have to wait and then get in line in the court system,” Mr. Ellis said.
Motels and multifamily residential properties, are among the properties at risk, brokers say. High-profile cases have included vacant Hollywood Hills mansions. In Mallorca, Spain, and a London hotel and pub leased by celebrity chef Gordon Ramsay were taken over by squatters, according to reports.
Barry Whitton, managing director at Burns & Wilcox Brokerage in Atlanta, mentions that these issues also arise in habitational real estate properties, especially in low-rent apartments that may lack proper management. Property policies cover losses from physical damage, such as vandalism and theft, but offer limited assistance to property owners in removing squatters.
Matthew Cox, Los Angeles-based real estate practice leader at Heffernan Insurance Brokers, notes that squatting is a regional problem. In Western markets like California, the demand for rental properties is high, resulting in low vacancy rates. Conversely, in the South and Midwest, the vacancy rates in multifamily properties are much higher.
“We’ve seen claims where squatters have taken over properties, requiring landlords to go through the legal process to remove them. This often results in property damage claims for any harm caused during their stay,” he said.
Budget hotels and multi-family properties are more vulnerable to squatting due to their transient nature, according to Mr. Ellis. Vacant properties, especially REO (real estate owned) properties that have been foreclosed on, also face higher risks. Insurers tend to view REOs more critically in their risk assessments as they frequently lack proper maintenance or security. An increasing number of REO properties in a portfolio “could impact the capacity they’re going to provide on your program and pricing,” Mr. Ellis stated.
Insurers will cover vacant properties, but they require information on whether a building is heated, the presence of security checks, whether the property is gated or locked, and the lighting conditions, says Mr. Whitton. Commercial property policies may limit coverage after 60 days, and insurers generally define a building as vacant if it has less than 31% occupancy by square footage. Failing to notify insurers about a building’s vacancy can lead to complete lack of coverage, Mr. Whitton warned.
“It’s always best to prevent a loss than count on insurance,” Mr. Cox advises. Implementing risk management strategies, such as installing security cameras, improving lighting, providing onsite security, and maintaining the property’s appearance, can deter squatters.
