While vacancy exclusions have been a staple of commercial insurance policies since the early twentieth century, to avoid protracted disputes, insurers should ensure no exceptions to the exclusions apply before relying on them to deny coverage.
In general terms, the vacancy exclusion eliminates coverage if a building is vacant for a certain number of consecutive days prior to a loss. The reason behind such vacancy exclusions is that a vacant building is a beacon to potential thieves or vandals. Courts have recognized, “[t]he primary purpose of [a] vacancy provision is to reduce the risk of loss by requiring a physical presence at the property to help secure the property from vandals and thieves.”[1]
In recent years, commercial vacancy exclusions have often come into play in connection with losses involving vacant strip malls or other commercial properties that are no longer in operation and have been unoccupied for quite some time. Often these facilities are only lightly monitored by part-time security, and sometimes have no security at all. The heating, ventilating and air conditioning units at these commercial complexes are a known to thieves as a source for valuable copper, are relatively unsecured, and can usually be found in abundance. Additionally, the HVAC units are commonly located in areas that are out of sight and that security patrols may not inspect routinely, such as on the roof. Thieves, often over a period of days, strip the HVAC units of their copper components. However, the theft may not be discovered until weeks or even months later, by which point significant losses may have already occurred.
A typical vacancy exclusion usually consists of two parts. First, there is a description or definition of the term “Vacancy,” for example:
6. Vacancy
a. Description of Terms
(1) As used in this Vacancy Condition, the term building and the term vacant have the meanings set forth in (1)(a) and (1)(b) below:
* * *
(b) When this policy is issued to the owner or general lessee of a building, building means the entire building. Such building is vacant unless at least 31% of its total square footage is:
(i) Rented to a lessee or sub-lessee to conduct its customary operations; and/or
(ii) Used by the building owner to conduct customary operations.
(2) Buildings under construction or renovation are not considered vacant.
The second part is the exclusionary or limiting language itself:
b. Vacancy Provisions
If the building where loss or damage occurs has been vacant for more than 60 consecutive days before that loss or damage occurs:
(1) We will not pay for any loss or damage caused by any of the following even if they are Covered Causes of Loss:
(a) Vandalism;
(b) Sprinkler leakage, unless you have protected the system against freezing;
(c) Building glass breakage;
(d) Water damage;
(e) Theft; or
(f) Attempted theft.
In the above-referenced example, the exclusion expressly precludes coverage for attempted theft, theft and vandalism losses that occur after the property has been vacant for more than 60 days under the terms and conditions of the policy. Obviously, this makes establishing the first date of loss critical to the adjustment.
One notable exception to the vacancy exclusion that should be addressed at the outset of a claim where vacancy may be an issue is the exception for properties undergoing “renovations.” It is critical to understand whether the insured property was undergoing renovations at the time of the loss or at any time within the 60-day “grace period” after the insured property became unoccupied. “Renovations” may have the effect of tolling this grace period, potentially lengthening the period of time during which a policyholder is covered for the above-referenced perils.
Historically, vacancy exclusions typically included an exception for buildings under construction, without providing an exception for buildings that were being renovated. However, a dispute over the scope of the term “construction” made it all the way to the California Supreme Court in 2006. In that case, the court reasoned that the phrase “construction,” as that term was used in a vacancy exclusion that did not include an exception for “renovations,” meant the functional equivalent to renovations or additions.[2]
Traditionally, a building that is being renovated is understood to have already been constructed and is merely being repaired or rebuilt, whereas a building under construction is typically understood to involve building something that was not previously there. Confusion over whether building renovations constitute “construction” has led many carriers to begin including both the terms “renovations” and “construction” in exceptions to the vacancy exclusion.
As a result, case law is still developing with respect to the scope of the terms “construction” and “renovations” in this context. However, courts have touched on the meaning of “renovations” and found it requires something more substantial than de minimis repairs or removal of material. Rather it requires work meant to renew, repair, or restore a building.[3]
While courts in Texas have not explicitly defined the term “renovations” in the framework of a commercial insurance policy’s vacancy exclusion, a Texas court would likely interpret the term “renovations” in a similar manner and require a more than de minimis showing of repairs or removal of material. Texas courts interpret insurance policies according to their plain terms and according to the terms’ generally accepted meaning absent some indication of a different intent. The Merriam-Webster dictionary defines the term “renovate” as follows:
1: to restore to a former better state (as by cleaning, repairing, or rebuilding)
2: to restore to life, vigor, or activity: revive
,[4]
As previously noted, vacancy exclusions are included in insurance policies because vacant buildings that sit unattended for extended periods of time become targets for vandals. Exceptions for renovations and construction, for instance, are included because, in such circumstances, the premises are appropriately monitored and the legitimate activity erodes the attractiveness of the site for the illegal activity. Consequently, when viewing the plain and ordinary definition of “renovations” through the lens of the vacancy exclusion, Texas courts would likely require a showing of a continuing presence on the property where significant repairs or restoration are being performed, such that the property would not be considered to be unmonitored.
That being said, an appeals court in Ohio determined that even one day of renovation work within the previous 60 days could be sufficient to overcome the vacancy exclusion and restart the clock on the 60-day grace period.[5] And, while this is not the trend among courts, an insurer would be wise to identify and address any activity that an eager insured might attempt to characterize as “renovations” that took place on the property during the 60-day vacancy grace period. In one instance, an insured attempted to avoid the application of a vacancy exclusion by arguing that the removal of coat racks constituted “renovations.”[6] Distinguishing “renovations” from minor repairs can be difficult, as a recently updated electrical system or the installation of new windows, for instance, is harder to detect than traditional “construction” activities.
Indicia of such activity that an insurer may look to in order to determine if any renovations occurred should include analysis of payrolls, rent rolls, contracts, invoices and building permits. Additionally, details about the continuing presence or absence of contractors, tradesmen, work crews, cleaning crews, tenants (who may perform independent renovations themselves) and particularly the insured’s own employees (who may also be working to renovate or repair the property) can be key in determining if the insured building is vacant, or not. An examination under oath may provide an effective means of obtaining information regarding the nature, scope and timing of work at the insured property.
While Texas courts are not likely to consider minor repairs, removal of materials (such as coat racks), or continuing maintenance to a property enough to constitute “renovations,” until this issue is resolved, insurers should identify and investigate the scope of any such activity that might be classified as “renovations.” Even work that is fairly limited in scope should be considered, as it may be easy to overlook and, while probably not legally sufficient to constitute “renovations,” it can be identified during the initial adjustment process and avoid a prolonged dispute.
[1] Oakdale Mall Assoc. v. Cincinnati Insurance Co., 702 F.3d 1119, 1122 (8th Cir. 2012). See also TRB Investments Inc. v. Fireman's Fund Insurance Co.., 40 Cal.4th 19, 22, 50 Cal.Rptr.3d 597, 145 P.3d 472, 474 (2006).
[2] See TRB Investments Inc. v. Fireman's Fund Insurance Co, 40 Cal.4th 19, 145 P.3d 472 (Cal. 2006).
[3] See e.g. Belich v. Westfield Insurance Co., No. 99-L-163, 2001 WL 20751, at *3 (Ohio Ct. App. Dec. 29, 2000) (holding “the purpose behind the … insurance policy was to protect itself from the very sort of liability as is at issue in this case. Renovation contemplates something being done at the building, not merely planning to renovate, remodel, or refurbish.”) (emphasis added); Will Realty Corp. v. Transportation Ins. Co., 22 Mass. App. Ct. 918, 919, 492 N.E.2d 372, 373 (1986) (finding that remodeling or refurbishing for purposes of an exception to a vacancy provision “looks to some substantial continuing activities of that sort on, rather than off, the property, and here there were none on the property (and indeed, virtually none off).”); The Farbman Grp. v. Travelers Ins. Companies, No. 03074975, 2006 WL 2805646, at *7 (E.D. Mich. Sept. 28, 2006) (analyzing the term “restoration” by reviewing three dictionary definitions and determining “‘renovation’ lies somewhere in the middle of the spectrum that spans between ‘repair’ and ‘remodeling.’” The court relied specifically on the testimony of the contractors performing the work at issue to determine whether that constituted “renovation” under the terms of the policy.); Suder-Benore Co. v. Motorists Mut. Ins. Co., 2013-Ohio-3959, ¶ 23, 995 N.E.2d 1279, 1286-87 (holding that renovation work necessary to avoid a vacancy exclusion means actual work meant to renew, to repair, or to restore and recognizing that when work is extensive, and the purpose of the work was consistent with the common understanding of what it means to perform “renovations,” there is coverage).
[4] "Renovate." Merriam-Webster Online Dictionary. 2018. http://www.merriam-webster.com (25 June 2018).
