The California Supreme Court holds that the "vacancy" exclusion in a property damage policy may not preclude coverage

Plaintiffs sued their insurer, Fireman's Fund, after Fireman's Fund refused to make payment for damages caused by a burst water heater/water line, which caused significant water damage. The property was unoccupied at the time because it was being renovated. Fireman's Fund pointed to the "vacancy" exclusion in the policy, which precluded certain coverage for vacant buildings except where the building was under construction. Fireman's Fund contended that the "under construction" exception only applied to the construction of a new building not the renovation of an existing building. Fireman's Fund obtained summary judgment in its favor. The Court of Appeal affirmed. The Supreme Court reversed with directions.

The primary focus of the case is the meaning of the term "under construction" contained in the policy's vacancy exclusion. The Supreme Court reversed the Court of Appeal's analysis, which focused on analyzing the terms "under construction" as consisting of only the erection of new structures, not renovations. The Supreme Court held that the correct inquiry for determining whether a building is "under construction" for purposes of defining an exception to the vacancy exclusion is whether the building project, however characterized, results in "substantial continuing activities" by persons associated with the project.

The Supreme Court found that the justification for the vacancy exclusion was the increased risk of loss due to vandalism or theft from an unoccupied structure. But the justification for the vacancy exclusion would no longer exist if there were workers at the premises reducing the risk of vandalism or theft. Accordingly, the exception to the exclusion should apply not only to new construction, but also to renovations or additions, so long as there was a substantial and continuing presence of workers at the insured premises. The Supreme Court ordered the summary judgment reversed subject to a new review by the trial court as to whether or not the facts supported "substantial continuing activities" at the premises so as to avoid the application of the vacancy exclusion.

Property owners and lenders should be aware of the vacancy exclusion contained in most first party policies especially where a property may be acquired through foreclosure and may become abandoned by an existing tenant or property is under construction or renovation and construction activities for some reason cease.

(TRB Investments, Inc., et al. v. Fireman's Fund Ins. Co., 2006 Cal. LEXIS 13520 (November 13, 2006).)

By Randy M. Hess & Duane W. Shewaga, Adleson, Hess & Kelly PC