In a case with broad implications for property owners near construction sites (Georgitsi Realty, LLC v. Penn-Star Insurance Company, No. 156, October 17, 2013), the New York Court of Appeals has opened the door to broad first-party property damage coverage for losses emanating from nearby construction activities. Georgitsi reached the Court of Appeals upon certification of two questions of first impression from the Second Circuit in a suit over an insurer’s denial of coverage under a Named Perils policy covering vandalism, as follows:
For purposes of construing a Named Peril property insurance policy covering acts of vandalism, could “malicious” damage be found to result from an act not directed specifically at the covered property?
If so, what state of mind is required?
Facts and Proceedings
The salient facts in Georgitsi are as follows: A property owner hired a contractor to develop a new building on its property that included an underground parking garage. The insured, who is the owner of a four-story apartment building adjacent to the construction site, claimed that excavation on the adjacent lot caused cracks and settlement in the foundation and walls of its apartment building. In response to the insured’s complaint, the Department of Buildings issued a series of violations and “stop-work orders” and levied fines on the property owner and its contractors; however, all these directives were ignored and work continued on the project.
The insured subsequently sought coverage for property damage under its Named Perils policy. The policy covered “direct physical loss or damage” caused by or resulting from enumerated risks, including “vandalism.” Vandalism is defined by the policy as “willful and malicious damage to, or destruction of, the described property.” The insured argued that it was entitled to vandalism coverage under the policy for malicious damage, even if, as here, it resulted from acts not directed at the covered property. The insurer denied coverage, arguing that construction-related damage was not “vandalism.”
Thereafter, the insured brought a coverage action in state court, which was later removed to federal court. The federal court entered summary judgment for the insurer, holding that the alleged conduct of the adjoining property owner and its contractors was not “vandalism” as defined by the policy. The insured appealed to the Second Circuit, which, in turn, certified the matter to the Court of Appeals.
A majority of the Georgitsi court held that vandalism need not be specifically directed toward the damaged property. In so ruling, it noted that, while case law involving insurance claims against policies covering “vandalism and malicious mischief” is sparse, it was persuaded by judicial authority and common sense that vandalism included malicious acts that cause unintended damage.
The majority found that the defining factor of vandalism is reckless conduct by a perpetrator, irrespective of whether the consequences are targeted at a particular victim. As the Georgitsi court stated, “[a]n excavator who is paid to dig a hole, and does so in conscious disregard of likely damage to the building next door, is, for these purposes, not essentially different from an irresponsible youth who might dig a hole on the same property, with the same effect, whether in search of buried treasure or just for fun.”
The majority also found that the perpetrator’s state of mind is a key ingredient that distinguishes vandalism from ordinary tortious acts and avoids converting property damage coverage into something that was not intended. The insured’s policy defined vandalism as “malicious” damage to property, so the Court was required to identify “what state of mind amounts to ‘malice’ for these purposes.” The Court adopted the same formulation used in reviewing awards of punitive damages: Conduct is “malicious” for these purposes when it reflects “such a conscious and deliberate disregard of the interests of others that [it] may be called willful or wanton” (citations omitted). By narrowly defining “malice” in punitive terms, the Court would distinguish vandalism from ordinary coverage for property damage.
A separate dissenting opinion agreed with the majority that a malicious act may constitute vandalism even if not directed at the specified property, but maintained that the state of mind required for “malicious” vandalism also requires “intent to damage property.” By requiring a conscious intent to cause property damage, the dissent reasoned, courts can distinguish between a malicious act of vandalism and unintentional property damage caused by reckless behavior. The dissent noted that a perpetrator who acts maliciously, but without the intent to damage property, does not commit an act of vandalism, “as that term is traditionally understood.”
Read together, the majority and dissenting opinions in Georgitsi yield the following rule of law: In the context of a claim under a Named Peril policy seeking coverage for “vandalism,” an insured may be able to recover damage to covered property so long as there is evidence of some malicious conduct on the part of the perpetrator. This is true even where, as here, the acts in question were not directed at – and did not bring the vandals in direct contact with – the covered property.
With the rise of construction in close proximity to developed properties, this question likely will arise again soon. As the majority correctly pointed out, care must be taken to ensure that Georgitsi doesn’t become a vehicle for turning first-party property insurance for vandalism into coverage for ordinary “tortuous conduct.” On remand, Georgitsi allows the trial court to consider whether the developer’s callous avoidance of stop-work orders and court injunctions amounts to malicious conduct that invokes “punitive” damages.
Future cases are unlikely to present similarly clear-cut factual indicia of the developer’s reckless indifference to legal enforcement mechanisms. Yet, it remains an open question as to what factors courts will consider in determining whether the relevant conduct rises to the level of “willfulness and wantonness” required by Georgitsi. As the dissent states, the majority does not require an “intent to damage property” as a criterion for finding vandalism coverage. The answer to this question must await future decisions.