Weekly Law Resume - May 16, 2013: Insurance Coverage – Duty to Defend – Vacant Property

by Low, Ball & Lynch
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Travelers Property Cas. Co. of America v. Superior Court of California, County of Los Angeles
Court of Appeal, Second District (April 17, 2013)

Most insurers do not like to insure empty buildings. Consequently, most commercial liability policies have exclusions for “vacant” structures. This case considered the applicability of a vacancy exclusion where the developer went bankrupt and the property was taken over by another investor.

On September 21, 2005, Joy Investment Group (“JOY”) obtained a $4.5 million construction loan from East West Bank (“EWB”), in order to construct a 13-unit condominium project. Under the construction loan agreement, JOY covenanted to maintain (1) fire and extended coverage; (2) builder‘s all risk coverage; and (3) general liability insurance. When the project was nearing completion, JOY defaulted, and the property was ultimately sold to an investor who foreclosed. Meanwhile, the builders’ risk policy had expired. JOY told its broker that a homeowners’ association had been created and most units sold, so the broker and JOY arranged for a condominium policy instead through Travelers Property and Casualty Company of America (“Travelers”). The policy was subject to 80% of the units being sold and occupied. It also excluded coverage for any loss or damage where the building had been “vacant” for more than 60 days.

Unfortunately, no certificate of occupancy was ever issued. Shortly after the new policy issued, the property was allegedly damaged by theft and vandalism. By this time, the investor was in possession of the property, and he filed a claim against the insurer for the losses from the theft and vandalism. The insurer denied the claim, on the basis that the condominium policy excluded coverage for such losses if incurred when the property was vacant.

The investor brought the instant action against Travelers for breach of contract, and against the broker (and the insurer, as the broker‘s principal) for professional negligence. Both defendants brought motions for summary judgment, which were denied. The investor argued (and the trial court agreed) that since only 30 days had passed from the time the policy was written until the alleged vandalism, the 60 day “vacant” exclusion could not apply. The trial court had agreed that any other interpretation would render the provision illusory the moment the policy was issued.

Travelers appealed. The Court of Appeal reversed, holding that Travelers was entitled to summary judgment and that the vacancy exclusion was applicable to the claim and plainly barred coverage.

Even though it had reservations as to whether there could even be a “reasonable expectation of coverage” where insufficient units had been sold or occupied to establish the existence of a homeowners’ association, the Court of Appeal noted that no one had raised that point. The Court thus assumed for purposes of appeal that there was reasonable expectation of coverage, and then turned to whether the vacancy exclusion language was conspicuous, plain and clear. The Court held that the language was conspicuous, appearing in the list of policy limitations, immediately following the grant of coverage. It was also plain and clear: if the property has been vacant for more than 60 consecutive days before? the vandalism or theft, there was no coverage for the vandalism or theft.

The Court of Appeal also disagreed that the 60 day limitation was illusory, since the loss here purportedly occurred within 30 days of the purchase of the policy. According to the Court, just because a vandalism claim occurred less than 60 days after the policy was issued did not render the policy provision illusory. Rather, it was anticipated that the particular coverage could trigger later in the policy period, after 60 days had passed. Hence, had the units been sold and occupied, coverage would then trigger, and any loss subsequently would have been covered.

Finally, the investor had argued that for the exclusion to be applicable, the building must be “completed.” The Court of Appeal disagreed. While the Supreme Court had considered a vacancy exclusion which expressly exempted unfinished buildings, there was no so language in the Travelers policy.

As to the claim of professional negligence against the broker (and against Travelers), the Court of Appeal concluded that the broker’s only duties ran to its clients, JOY and the HOA, and not to the investor.

Since the Court of Appeal held that the exclusion firmly applied, the investor could not state a cause of action for breach of contract, and the Court of Appeal reversed the trial court, granting summary judgment for Travelers.

COMMENT
The Court of Appeal noted that the investor’s recourse, if any, was against JOY, for obtaining the wrong type of policy for what was still a vacant building. The vacancy exclusion clearly will apply to losses while a building is still considered “vacant” under its terms.

For a copy of the complete decision see:

http://www.courts.ca.gov/opinions/documents/B243650.PDF

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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