Carriers Must Pay For Losses During Rehab
High Court Finds Empty Buildings Not an Exception
By Itir Yakar, Daily Journal Staff Writer
November 14, 2006
Property insurers took a blow from the state Supreme Court Monday after the court held that insurance companies cannot get out of their duty to pay for losses during renovation projects simply because the projects are not part of new construction.
In a case of first impression, the high court held that common clauses in insurance policies meant to decrease the risk to insurance companies when buildings are vacant cannot be used to deny claims when there's ongoing renovation.
Plaintiffs' lawyers say the case will impact millions of Californians who take out insurance policies for their homes or businesses. Defense lawyers countered that the ruling does not change the landscape of California insurance litigation.
Ruling unanimously, the Supreme Court concluded that buildings undergoing renovation should not be considered vacant for coverage purposes.
The case was appealed by the owners of a Bakersfield commercial property after their insurer refused to pay for substantial damage caused by a ruptured water heater as they were renovating the building in July 2001.
They submitted a claim for $160,000 for the damages they incurred as they were renovating the building for their new tenant, Goodwill Industries.
The insurance contract excluded coverage during periods of vacancy of 60 days or more, since there would be an increased risk of vandalism or theft. The vacancy exclusion did not apply if the property was "under construction."
Firemen's Fund Insurance Co. argued that it shouldn't have to pay TRB Investments for the damage caused by the water heater because the renovation did not count as construction.
The California Supreme Court disagreed Monday.
The term "construction" encompasses "all building endeavors, whether classified as new construction, renovations, or additions, which require substantial and continuing presence of workers at the premises," Justice Carlos R.
Moreno wrote for the court. Moreno pointed out that the high court's conclusion "serves the purposes underlying the vacancy exclusion, which is premised upon the recognition that unoccupied properties face an increased risk of damage, whether from property-related crime such as theft or vandalism or from building damage or loss related to neglect."
The ruling reverses a unanimous 5th District Court of Appeal panel ruling from last year that held that the renovation was not covered under the policy as construction. The panel affirmed a summary judgment motion Kern County Superior Court Judge Arthur E. Wallace granted in favor of Fireman's Fund.
The high court sent the case back to the 5th District to determine whether TRB Investments can prove workers were continuously present at the site to make them eligible to collect damages.
Amy Bach, the executive chair of United Policyholders, which filed an amicus brief on behalf of TRB Investments, hailed the ruling as a victory.
"Millions of people are impacted by a ruling like this," Bach said. "People are doing repairs, remodeling [of their homes… There's always construction going on."
She said courts must watch out any time insurance companies take policy positions that pit them against policyholders.
Timothy L. Kleier, the Bakersfield attorney who represented the property owner, said he thinks California's high court took the right side on an issue that has split state courts across the nation.
State courts from Missouri, Mississippi, Louisiana and Colorado have reached the same conclusion at California's high court, he said. Texas and Illinois are among the minority of states that have excluded renovation from their definition of construction, he said.
Kleier said the ruling may allow some policyholders to reassert past claims if their statute of limitations has not run out.
He also suggested that consumer advocacy groups may bring class actions on behalf of policyholders and potentially collect millions of dollars in refunds of insurance premiums for "illusory policies" that were never meant to provide coverage under similar circumstances.
John Hager of Hager & Dowling in Santa Barbara represented Fireman's Fund. He said the ruling will not have a big impact on insurance litigation since the "under construction" exception is not so common.
That assessment was echoed by Sonia Waisman, a Morrison Foerster partner in Los Angeles who specializes in insurance coverage litigation.
"It doesn't seem to change the insurance landscape," said Waisman, who was not involved in Monday's case.
Hager said the Supreme Court adopted a new standard and acknowledged that the parties were not aware of the new standard while arguing the summary-judgment motion before Wallace.
"Under the new standard, I believe we're still entitled to summary judgment," Hager said.
He insisted that there was not "a substantial and continuous presence of workers at the premises."
