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INSURANCE NOTES

A Loss to a Building Being Renovated May Be Covered Under the "Under Construction" Exemption to the "Vacant Building" Property Exclusion

12.15.2006
In a matter of first impression, the California Supreme Court held in TRB Investments, Inc. v. Fireman's Fund Insurance Company, 50 Cal.Rptr. 597 (11/13/2006) that the "under construction" exception to a property policy's vacancy exclusion contemplated all building endeavors, whether new construction or renovation, that required a substantial and continuing presence of workers at the premises. Under those circumstances, therefore, a loss to a building undergoing renovation would be covered. In TRB, the insurer issued a property insurance policy, which excluded vacant buildings unless the building was "under construction."¹ The policy also provided that the insurer may cancel the policy upon the occurrence of certain specified conditions, including that "[t]he [insured] building has been vacant or unoccupied 60 or more days." However, this cancellation provision stated that it did not apply to "[b]uildings in the course of construction, renovation or addition."

In 2001, the insured retained an architectural firm and a general contractor to renovate the building at issue after the building tenant moved out. Electrical and HVAC work commenced in June and July 2001, respectively. On July 16, 2001, workers discovered that a water heater or waterline in the building had burst sometime between July 14 and July 16, 2001, causing significant water damage.

The insured tendered the water damage claim to the insurer under the policy. Coverage was denied. Later, in a suit, the insurer obtained summary judgment in its favor based upon the vacancy exclusion. The Court of Appeal affirmed, concluding that the vacancy exclusion applied because the meaning of "under construction" in the policy did not encompass renovations to an existing structure, as was being performed by the insured at the time of the water damage.

The California Supreme Court reversed the Court of Appeal decision. The Court began its analysis by examining the dictionary definitions of the terms "under" and "construction" for their common meaning. The Court noted that "under" meant "receiving or undergoing the action or effect of." "Construction" included "the act of putting parts together to form a complete integrated object" and "[t]he act of building by combining or arranging parts or elements." The Court also considered various legislative statutes, which defined the term "construction" as including substantial renovation, repair, or alteration efforts. Applying these definitions, the Court concluded that the phrase "under construction" was not limited to the erection of completely new buildings. Instead, the Court interpreted the phrase as including "other types of building endeavors short of erecting a new structure, such as substantial improvements or modifications to an existing structure."

In so ruling, the Court rejected the insurer's argument (which the Court of Appeal had adopted) that "construction" was not intended to include renovations or additions to an existing structure because the cancellation provision distinguished between construction, renovation and addition. The Court stated:

This interpretation, which binds an insurer to a contract in which it is not obligated to provide coverage for lack of occupancy, makes little sense. There would appear no principled reason why, if vacancy for purposes of renovation violates a provision of the insurance contract such that the insurer need not provide coverage, then the insurer should not also be empowered to cancel the contract based upon the same violation of the contract terms.

We believe the more reasonable interpretation is that the term "under construction" as used in the vacancy exclusion was meant to be the functional equivalent of "construction, renovation or addition" as used in the cancellation endorsement, i.e., the latter provides a more detailed gloss on the former.

The Court concluded that the "proper 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 at the premises during the relevant time period." The Court listed a series of factors to be considered when determining whether there were "substantial continuing activities" by construction personnel, including the number of people working on the construction project, how many hours per day or days per week they were in the building, and how much of the building was occupied by these workers at any given time. The Court also made clear that "sporadic entry" would not be sufficient to satisfy the "substantial continuing activities" standard. The case was remanded to the trial court to allow the parties to present facts germane to the Court's "substantial continuing activities" standard.

The case was remanded to the trial court to allow the parties to present facts germane to the court's "substantial continuing activities" standard.
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¹The vacancy exclusion stated:

If loss or damage occurs to a building that has been vacant for more than 60 consecutive days prior to the occurrence of that loss or damage, we will:

a. not pay for any loss or damage caused by:

1. Vandalism;
2. Sprinkler leakage, unless you have protected the system against freezing;
3. Building glass breakage;
4. Water damage;
5. Theft, or
6. Attempted theft.

b. Reduce the amount we would otherwise pay for the loss or damage by 15%.

A building is vacant when it does not contain enough business personal property to conduct customary operations.

Buildings under construction are not considered vacant. (Emphasis added.)

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