Developers, owners and contractors that renovate or remodel commercial buildings need to know that a recent decision of the California Supreme Court will likely affect their property insurance.
In TRB Investments, Inc. v. Fireman’s Fund Ins. Co. (Nov. 13, 2006) 2006 Cal. LEXIS 13520, a vacant commercial building was undergoing major renovations when a water heater sprung a leak, causing substantial water damage. The property insurance policy contained a typical "vacancy" exclusion, providing that, if a building has been vacant for 60 consecutive days, there is no coverage for losses caused by vandalism, theft, water damage and the like. But, under an exception to that exclusion, the policy did provide coverage if the building was "under construction" during the period of vacancy.
The insurer denied coverage because the building was vacant and then argued that the "under construction" exception should be understood to refer only to the "building of a new structure."
In a case of first impression, the Supreme Court disagreed and rejected the insurer’s narrow reading of the policy. It explained that laypersons would not understand the term "under construction" in such a limited way. Looking beyond the "construction" vs. "renovation" terminology, the justices focused on the function served by the exclusion and the exception: Those provisions protect the insurer against increased risk of loss when a building is vacant. But when workers are present during substantial construction activity, the risk is similar to that of an occupied building. Thus, the Court held that the "under construction" exception to the vacancy exclusion should be applied by determining whether there are "substantial continuing activities" on the premises by individuals working on the project.
The lesson of the case is straightforward: If your property insurance is similar to the policy in TRB Investments, you will likely be covered for losses if renovations, modifications or construction proceed at a sustained level of activity. But, because we know construction delays and interruptions are often the norm, this approach could mean that your property is uninsured during periods of vacancy.
But why risk it? If property will be vacant during construction activity, the prudent course is to contact your broker in advance to negotiate more favorable policy terms. If that fails, you should purchase additional coverage that will protect your property during construction.
Carl L. Blumenstein, partner at Nossaman, specializes in insurance coverage and complex business litigation disputes. He can be reached at firstname.lastname@example.org.