Economic forecasters have been anticipating a significant spike in real estate foreclosures and evictions as a result of the coronavirus pandemic since before states began issuing lockdown orders in March 2020. The effects have been muted by government action on the residential front—for now—but commercial markets are starting to feel the downturn. This post examines one of the issues insurance professionals can expect when handling property claims associated with the increasing inventory of distressed property.
Census data indicates that third quarter 2020 vacancy rates for housing units are slightly lower than the same period last year, albeit with far less data available due to reduced collection efforts. While this may come as a surprise, the staggering jobless numbers will sooner or later translate to missed mortgage and rent payments, foreclosures, evictions, and—eventually—vacancies.
The Vacancy Exclusion
Standard commercial and residential property insurance policies contain a provision that severely restricts coverage for buildings that have been vacant for an extended period of time, usually 60 days. This exclusion is commonly called the vacancy exclusion or vacancy provision. The purpose of the vacancy exclusion is to limit insurer’s liability for vacant properties, which are at higher risk of loss for vandalism, theft, and neglect. TRB Investments, Inc. v. Fireman’s Fund Ins. Co., 40 Cal.4th 19, 22 (2006).
Proceed with extreme caution when it appears the vacancy exclusion applies. As is the case with nearly all property insurance issues, interpretations of the vacancy exclusion vary heavily by jurisdiction. Furthermore, courts tend to interpret coverage exclusions – including the vacancy exclusion – narrowly. West Bend Mut. Ins. Co. v. New Packing Co., Inc., 2012 IL App (1st) 111507-U. illustrates how fickle this exclusion can be.
In West Bend, the insured meat packing company purchased a new warehouse and vacated their former location. The insured obtained an endorsement to provide coverage for the new warehouse. More than 60 days after the original warehouse was vacated, but only a few days after the endorsement for the new location was added, the old warehouse sustained over $1 million in vandalism damage. The insurer denied the claim on the basis of the vacancy exclusion, which precluded coverage for acts of vandalism that occur after 60 consecutive days of vacancy. The insured sued for coverage, claiming the 60-day period did not begin until the endorsement for the new location was added and also that the vacancy provision was ambiguous and therefore unenforceable.
At trial, the insured was awarded summary judgement in favor of coverage, and the decision was affirmed by the Illinois Appellate Court. “Prior to issuing an endorsement to the policy adding the warehouse as an insured property, West Bend had an opportunity to inspect the premises to determine if it was vacant. Thereafter, West Bend could have chosen not to underwrite the risk or it could have chosen to provide coverage at an additional premium.” West Bend Mut. Ins. Co. v. New Packing Co., Inc., 2012 IL App (1st) 111507-U, ¶ 18 (unpublished opinion used for illustrative purposes, not to be cited as precedent). In other words, the insurer could not deny coverage under the vacancy exclusion because it had an opportunity to determine whether the property was vacant by conducting an inspection of the property. Because the insurer issued the policy and accepted the premium without first finding out if the property was vacant, they effectively waived their right to deny coverage for the vacancy.
As is often the case, careful policy drafting and tighter policy language can make the exclusion much harder to get around for policyholder-friendly courts, even in the context of a foreclosure. In Community Bank v. United States Liability Ins. Co., 85 Mass.App.Ct. 1125 (2014), the insurer’s vacancy exclusion applied to property that was “vacant or unoccupied.” Following a foreclosure, the plaintiff bank initiated eviction proceedings to evict the former owner and named insured from the premises. Shortly after the eviction proceedings began, the named insured reported to police a break-in at the insured premises.
Furniture, stereo equipment, and part of the heating system were stolen, and there was apparently also vandalism damage. The insurer denied coverage for theft damage citing the vacancy exclusion and arguing that the insured premises was unoccupied at the time of the loss. The bank sued for coverage under the mortgage clause, arguing that the term “unoccupied” was ambiguous. The claims investigation and discovery revealed the insured had stopped living at the insured premises, although some of her belongings were still present.
The Massachusetts Court of Appeals upheld the declination of coverage. It found that the term “unoccupied” was not ambiguous under Massachusetts law. It further found that the insured premises was unoccupied because it was no longer used as “a customary place of abode” because the insured had moved out. The presence of the insured’s personal property was not sufficient to establish “occupancy” for the purpose of the vacancy exclusion analysis.
These cases demonstrate the considerable variation seen in litigation regarding the vacancy exclusion. Insurance professionals should therefore be very cautious when interpreting and applying the vacancy exclusion.
In addition to the potentially significant exposures caused by COVID-19 on both commercial and personal lines of property insurance, insurance professionals must not discount the human cost of this crisis. Adjusters today are rightly taught to treat each customer with respect and dignity. This is as true for customers who are experiencing economic hardships like eviction and foreclosure as it is for customers who are not. As the economic fallout from the COVID-19 pandemic spreads, insurance professionals will do well to remember their obligation to treat customers fairly, whatever their circumstances, when navigating the claims landscape. Avoid pitfalls and traps with the help of experienced, local attorneys who understand that great service and legal knowledge should always go hand in hand.