Insurance Law Client Alert: Building Vacancy Conditions Applied Without Regard to Policy Effective Date; Broker Free from Duty to Subsequent Owners

In a case of first impression in California, the Second District of the Court of Appeal, in Travelers Property Casualty Company v. Superior Court (no. B243650, filed 4/17/13), enforced vacancy provisions limiting coverage where a building had been vacant more than 60 days prior to loss. In affirming summary judgment for the insurer, it held the vacancy conditions applied unambiguously even though the loss occurred within 60 days of policy issuance.

The issue arose when the developer of an unfinished condominium project defaulted on its construction loan. Its builders’ risk insurance had lapsed and, prior to the foreclosure, its agent obtained condominium association insurance from Travelers.

After foreclosure by the project’s note holder, and less than 60 days after inception of the Travelers policy, vandals damaged the property, including removal of all appliances and fixtures.

The new owner, as the loss payee under an assignment obtained in the foreclosure, made a claim against Travelers. When Travelers denied coverage in reliance on a 60-day vacancy limitation, the owner sued for bad faith and also alleged professional negligence against its agent. The new owner argued that the vandalism exclusion should not apply since Travelers could not prove the policy had been in effect for 60 days when the loss occurred.

The property policy excluded coverage for vandalism and theft, “even if they are Covered Causes of Loss, if the building where loss or damage occurs has been ‘vacant’ for more than 60 consecutive days before that loss or damage occurs. . . .” Based on that language, the Court of Appeal held that the exclusion applied if the building was vacant in the sixty days before loss, regardless of whether the policy was in force that entire time.

The California Court of Appeal joined the majority of courts enforcing such wording. It distinguished the pertinent clause from wording that excludes losses when the building is vacant “beyond a period of sixty days.” Citing that distinct phrasing in the policy in Gas Kwick, Inc. v. United Pacific Ins. Co. (11th Cir. 1995) 58 F.3d 1536, the Travelers court said that “the use of ‘beyond’ is prospective-looking and must therefore commence at or after policy issuance. However, when the policy language is defined in terms of ‘days before [the] loss,’ the time period is clearly backward-looking from the date of the loss, and does not implicate policy issuance…. There is no ambiguity in the instant policy; the period is backward looking from the date of the loss.”

The Travelers court also distinguished TRB Investments, Inc. v. Fireman’s Fund (2006) 40 Cal.4th 19, where the vacancy exclusion contained an express exception stating that buildings under construction are not considered vacant. In the absence of such an exception, Travelers was free to apply its exclusion.

Finally, the court also ruled that the agent owed no duty of care to the subsequent owner to obtain insurance that would have applied to a vacant building. Since the agent procured the policy on behalf of the developer only, it could not be liable to the subsequent owner for any professional negligence.

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April 22, 2013