(Because Residence Was Vacant For 60 Consecutive Days, Vacancy Exclusion in Property Policy Applied to Bar Coverage of Water Damage Claim Under Policy)

(December 2020) - In St. Mary & St. John Coptic Orthodox Church v. SBS Insurance Services, Inc., ----Cal.App.5th--- (November 23, 2020), the California First District Court of Appeal reversed the trial court's entry of judgment in favor of SBC Insurance Services ("SBC") regarding a claim for water damage sustained by a residence owned by St. Mary & John Coptic Church ("St. Mary") under property coverage afforded by a policy issued by Philadelphia Indemnity Insurance Company ("Philadelphia"). The policy was procured by SBC on behalf of St. Mary. Philadelphia denied coverage of the claim based on the vacancy exclusion in its policy, but entered into a settlement and loan receipt agreement, whereby St. Mary gave Philadelphia the right to control litigation in St. Mary's name against SBC or third parties who might be liable for the loss in exchange for a loan of money to repair and remediate the damage sustained by the residence. The loan was to be repaid out of any recovery made against SBC or third parties. After a bench trial, the trial court found in favor of SBC and held that the vacancy exclusion was ambiguous. Essentially, the exclusion did not apply to the time period prior to the time St. Mary purchased the residence, such that the 60-day vacancy requirement could not be satisfied. The trial court reasoned that since St. Mary did not have an insurable interest in the property before it purchased the property, the 60-day requirement did not include the period before such residence was purchased and St. Mary held an insurable interest.

The parties' dispute arose of out of the Pope of the Coptic Church requesting St. Mary to purchase a home to be used as his papal residence in the Western United States. St. Mary also intended to use the home as a residence for visiting bishops. The home was purchased on May 28, 2015. As part of the purchase, SBC placed the home under St. Mary's commercial policy, rather than purchasing a separate homeowner's policy for the residence. Subsequently, the home sustained water damage due to a broken pipe. The water damage was discovered on July 24, 2015, 57 days after the inception of the Philadelphia policy and the loss. St. Mary tendered the property loss to Philadelphia, which denied coverage of the claim based on the reasoning that the home had been vacant for 60 consecutive days prior to the loss. Subsequently, St. Mary filed suit against SBC after securing the loan receipt agreement with Philadelphia based on the argument that the vacancy exclusion barred coverage of the claim and SBC breached its duty of care by not securing the proper coverage of the home. The trial court entered judgment in favor of SBC finding that the vacancy exclusion did not apply to bar coverage of the loss, such that SBC did not breach its duty of care owed to St. Mary as its broker.

In reversing the trial court's decision, the Court of Appeal held that the vacancy exclusion applied irrespective of the fact that the Philadelphia policy incepted 57 days before the loss, as the home was vacant for over 60 days from the date of loss, notwithstanding when the Philadelphia policy incepted. The Court of Appeal reasoned:

Vacancy provisions like the one at issue, which bar coverage for loss occurring in a property that is vacant for a certain period of time "before that loss or damage occurs," have been found to be clear and unambiguous in specifying that they apply retrospectively from the time of loss rather than prospectively from policy inception. In Travelers Property Casualty Co. of America Superior Court (2013) 215 Cal.App.4th 561 [155 Cal. Rptr. 3d 459] (Travelers), the court interpreted a vacancy exclusion stating, "'We will not pay for any loss or damage ... if the building where loss or damage occurs has been "vacant" for more than 60 consecutive days before that loss or damage occurs... ." (Id. at p. 575.) There, a property investor (who had purchased the condominium developer's construction loan) submitted a claim after theft and vandalism at the vacant condominium development, and the insurer denied the claim under the policy's vacancy provision. (Id. at p. 565.) The trial court found the loss was not excluded because the 60-day period ran from the date of policy inception and 60 days had not run between the inception date and the date of the loss. (Id. at pp. 575-576.) The appellate court reversed. Contrasting vacancy provisions that are triggered if the property is vacant "'beyond a period of sixty days,'" which is prospective-looking language commencing at or after policy issuance, the policy language was clearly and unambiguously backward-looking from the date of the loss, irrespective of when the policy issued. (Id. at p. 576; accord' Gas Kwick, Inc. v. United Pacific Ins. Co. (11th Cir. 1995) 58 F.3d 1536, 1539 (Gas Kwick).)

Travelers  and Gas Kwick are not on all fours, however, as neither case addressed a situation where the insured did not own the property for the full vacancy period. Nonetheless, their interpretation of similar policy language is persuasive, as they recognize that the policy language at issue does not implicitly impose limitations not set forth in the provision. The courts in Travelers  and Gas Kwick rejected policy interpretations that would impose on the vacancy provisions a limitation that the 60-day period commenced only at or after policy issuance. (Travelers, supra, 215 Cal.App.4th at p. 576 ["[t]here is no limitation in the [vacancy] clause" stating that the 60-day period "must commence at or after policy issuance"]; Gas Kwick. supra, 58 F.3d at p. 1538 [vacancy provision excluded coverage where property was vacant for more than 60 days "'before that loss or damage"; rejecting insured's argument that provision was limited to period running after policy inception date].) In this case, SBC asserts that the vacancy provision is limited such that the 60-day period commences only upon the insured's ownership of the property. But the policy language does not contemplate or impose such a limitation, instead excluding coverage for losses resulting from water damage "if the building where loss or damage occurs has been vacant for more than 60 consecutive days before that loss or damage occurs." When a loss occurs, the sole inquiry is whether the building has been vacant for the prior 60 consecutive days. This language unambiguously counts backwards without regard to ownership. (See West Bend Mutual Ins. Co. v. New Packing Co. (Nov. 30, 2012, III.App.Ct., No. 1-11-1507) 2012 IL App (1st) 111507-U [2012 III. App. Unpub. Lexis 2908, pp. **15-17] [vacancy provision denying coverage for certain perils where building was vacant more than 60 consecutive days before that loss or damage occurs clearly counted backwards and included days the building sat vacant in escrow; however, insurer with the opportunity to inspect the building could not rely on the vacancy provision].)

Contrary to SBC's position, this interpretation of the policy does not violate the insurable interest requirement of section 280. Under that statute, "If the insured has no insurable interest, the contract is void." "'The simple rule that one cannot insure for his own benefit the property of another in which he has no interest still governs." (Napavale, Inc. v. United Nat. lndem. Co. (1959) 169 Cal.App.2d 119, 124 [336 P. 2d 984].) However, the Insurance Code clearly sets forth that an insurable interest in property "must exist when the insurance takes effect, and when the loss occurs, but need not exist in the meantime." (§ 286.) These requirements were satisfied here.

The Court of Appeal also found that the home was "vacant" as defined in the policy. The Court of Appeal held as follows:

Under the policy, "'buildings' are vacant when they do not contain enough business personal property to conduct customary operations." The trial court found that "business personal property" and "customary operations" should have been defined if the insurer intended to rely on their plain meaning. It criticized Philadelphia's coverage position that the residence would need to look like a normal furnished residence and stated that whether the residence contained enough business personal property to conduct customary operations depended on the residence's intended use as a residence for visiting clergy. With respect to the three days before escrow closed, the trial court found that St. Mary did not produce evidence showing the residence's condition or its customary operations. The court cited Tadros's testimony that he did not know whether anyone moved items in and out of the residence before escrow closed, and testimony from another witness that Philadelphia did not contact the seller to inquire about the condition of the residence in these days. The court also found that the residence was not vacant during this time because its customary operations were that of a residence for sale. Finally, the court relied on admissions by St. Mary in a coverage dispute letter to the effect that the residence contained sufficient business personal property such that it was not "vacant" before and after the close of escrow. For those reasons, the trial court concluded that St. Mary did not carry its burden of proof to show the residence was vacant as defined by the policy.

. . .

As applied, the terms "customary operations" and "business personal property" were not ambiguous merely because the policy did not define them. (See Bay Cities Paving & Grading, Inc. v. Lawyers' Mutual Ins. Co. (1993) 5 Cal.4th 854, 866 [21 Cal. Rptr. 2d 691, 855 P.2d 1263] [term that was undefined was not necessarily ambiguous]; Brown v. Mid-Century Ins. Co. .(2013) 215 Cal.App.4th 841, 858 [156 Cal. Rptr. 3d 56] [undefined term did not render a policy unclear].) St. Mary was insured as a religious organization, and it planned to use the "building" where the loss occurred as a residence for the Coptic Pope in the western United States and for visiting clergy. Thus, the residence was vacant if it lacked sufficient personal property to conduct operations as a residence for the Coptic Pope and for these clergy. Further, for the three days before escrow closed, the residence was vacant if it did not contain enough personal property to operate in accordance with its customary use as a residence.

. . .

We next analyze whether the trial court erred in its determination that St. Mary did not carry its burden of proving that the residence was vacant in light of the policy definition and the facts presented at trial. On the question of what constitutes sufficient personal property to operate a building as a residence, Belgrade v. National American Ins. Co. (1962) 204 Cal.App.2d 44 [22 Cal. Rptr. 21] is instructive. Under the policy there, loss caused by certain perils was not covered if the property was vacant more than thirty days preceding the loss, and "'[a] building intended for residence by human beings shall be deemed to be vacant within the meaning of this policy unless such building contains the furnishings ordinarily contained therein to enable the use of said building for the purpose for which it is adapted ... ."' (Id. at pp. 45-46.) The loss occurred in a two-story, 10-room house listed for sale. (Id. at p. 46.) The house contained a chaise lounge, two mattresses on the floor, sheets, pillow cases and pillows, six blankets, two suits, shirts, underwear, bath towels, hand towels, toiletries, toothbrushes, dental floss, soap, a breakfast room table and four chairs, a kitchen stool, a captain's chair, a folding chair, pots, pans, an electric hot plate, a built-in soda fountain, silverware, plates, cups, glasses, dishes, a radio, a vacuum cleaner, dust mops, brooms, brushes and garden implements. (Ibid.) All utilities and phones were connected, and the owners were in the home as early as 8:00 a.m. and left as late as midnight. (Ibid.) The trial court found that the premises were vacant within the policy's meaning because "'the dwelling ... did not contain furnishings ordinarily contained in such a building to enable the use of said building ...' ... as a place of "'residence by human beings.'" (Id. at p. 47.) The appellate court affirmed, stating, "In view of the evidence ... of how sparsely the house was furnished, it is obvious that the record amply supports such determination of the trial court." (Ibid.)

On the undisputed evidence presented at trial, the residence here did not contain enough personal property to operate as a residence for the Coptic Pope in the western United States and for visiting clergy. With the exception of a single chair, the multiple-room residence was entirely unfurnished. There were some appliances, an HVAC system, some window treatments, a plant, and toilet paper, but these limited items were not sufficient to operate the building as a residence even for those who would only stay there temporarily. (Cf. Hehemann v. Michigan Millers Mutual Ins. Co. (Fla.Dist.Ct.App. 1970) 240 So.2d 851. 853¬854 [concluding as a matter of law that a house with only drapes and built-in kitchen appliances was vacant under a homeowner's policy that did not define the term]; American Mutual Fire Ins. Co. v. Durrence (11th Cir. 1989) 872 F.2d 378, 378-379 [home that was empty except for a refrigerator, stove, washing machine, and a table "lacked amenities minimally necessary for human habitation" and was vacant as a matter of law under a home insurance policy that did not define the term].)

Regarding the 58th, 59th, and 60th days before the loss, while St. Mary did not produce direct evidence of the residence's condition during these days or testimony from the seller regarding his or her customary use of the property, the evidence compels a finding that it was more likely than not the residence was customarily used as a residence, and it was vacant—in other words, it did not contain enough personal property to operate as a residence—during those three days. (Masellis v. Law Office of Leslie F. Jensen (2020) 50 Cal.App.5th 1077, 1093 [264 Cal. Rptr. 3d 621] [the preponderance of the evidence standard requires proof that something is "'more likely than not'"].) Uncontradicted evidence established that the building was a residence. The residence had been up for sale before Tadros visited it in early April 2015. Tadros testified that during his visit, the residence was empty of furniture and it would have been apparent to someone looking in the windows that no one lived there.

The Court of Appeal also held that the vacancy exclusion was sufficiently conspicuous in the policy. Lastly, the Court of Appeal rejected SBC's argument that St. Mary had not been damaged due to the loan receipt agreement with Philadelphia.

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