Vacancy Exclusion Barred Coverage For Vandalism Claim; Insurance Broker’s Duty Was To Procure Insurance Requested By Client, Not What May Be Required By Lender

Vacancy Exclusion Barred Coverage For Vandalism Claim; Insurance Broker’s Duty Was To Procure Insurance Requested By Client, Not What May Be Required By Lender

05.08.2013

In Travelers Property Casualty Company of America/Koram Insurance Center, Inc. v. Superior Court (Braum) __ Cal.Rptr.3d __, 2013 WL 1638157 (2013), an investor (Braum) in the development of a 13-unit condominium complex sued the developer’s insurer (Travelers) and insurance broker (Koram) for breach of contract and professional negligence, respectively, after the vandalism claim it made under the developer’s policy was denied.

To start the project, the developer had obtained a construction loan from a bank, which required the developer to maintain builder’s risk insurance on the property and to identify the bank and its successors and assigns as loss payees on the policy. The developer, with the help of its broker, obtained a construction policy. When the project was near completion, the developer defaulted on the construction loan. The developer formed a homeowner’s association and represented to its broker that most of the condominium units had been sold (which was untrue). Based on that representation, the broker proposed replacing the builder’s risk policy with a condominium policy issued to the homeowners association. The developer agreed, and the broker obtained from Travelers a condominium policy for the homeowners association. The investor (plaintiff) purchased the developer’s loan from the bank, becoming the bank’s successor and a loss payee.

Shortly thereafter, the building was allegedly vandalized, giving rise to the investor’s claim to Travelers under the condominium policy. Travelers denied the claim, in part, because the building had never been completed or occupied (as had been represented by the insured) and was therefore subject to the policy’s “vacancy exclusion.” The investor sued Travelers. Travelers moved for summary judgment. The trial court denied the motion. Travelers appealed.
 
The Court of Appeal reversed, finding: (1) the critical 60-day vacancy period plainly applied to bar coverage; and (2) the vacancy period need not have begun after inception of the policy. The Court emphasized the fact that the building was never completed and a certificate of occupancy was never issued.

As against the broker, the investor claimed that he was a successor to the bank and the broker thus owed the investor a duty to maintain insurance on the property that would have covered the vandalism loss. The Court of Appeal rejected the claim, noting that the broker obtained the insurance sought by its clients. The Court observed that “the broker owed no duty to the investor to provide any particular type of coverage to the developer and the homeowners association, its clients. If the developer breached its contract with the bank (and its assignee) by failing to maintain builder’s risk insurance, the remedy of the investor, if any, is against the developer.”