Key Decisions

May 2013 – A Vacancy Exclusion Barred Coverage

(filed under: Key Decisions Archive | May 20, 2013)

A Vacancy Exclusion Barred Coverage

Travelers Property and Casualty Company of America v. Superior Court
(Cal. Ct. of App., 2d Dist.), filed April 17, 2013

KEY FACTS

Joy Investment Group obtained a construction loan from East West Bank, and began construction on a multi-unit condominium complex. The bank required Joy to maintain builder’s risk insurance on the property and to identify the bank, and its successors and assigns, as loss payees. Joy did so.

The bank sold the loan to an investor.

Before the complex was completed, Joy fell behind in its loan payments.

The builder’s risk policy lapsed after the assignment to the investor, but before the foreclosure sale. Joy sought a new policy. At this point, Joy represented to the insurance broker that a homeowners association had been created, and that most of the condominium units had been sold. Given those facts, the broker discussed the possibility of replacing the builder’s risk policy with a condominium policy issued to the homeowners association. Joy agreed and obtained a condominium policy for the homeowners association.

In actuality, no certificate of occupancy was ever issued, no units were ever occupied and any sales which may have been pending failed to close.

Shortly after the new policy was issued, the property was damaged by theft and vandalism. Joy filed for bankruptcy and the investor obtained the property through foreclosure. The investor then filed a claim against the insurer for the losses from the theft and vandalism. The insurer denied the claim, on the basis that the condominium policy excluded coverage for such losses if incurred when the property was vacant.

The investor sued the insurer for breach of contract, and sued the insurer and broker for professional negligence. The insurer and broker moved for summary judgment, but the trial court denied the motions.

HOLDING & REASONING

The Court of Appeal issued a writ of mandate directing the trial court to grant the motions. It ruled that as to the investor’s cause of action for breach of contract against the insurer, the vacancy exclusion was applicable to the claim and plainly barred coverage. As to the investor’s cause of action for professional negligence, the broker owed no duty to the investor to provide any particular type of coverage. The broker only owed a duty to his clients, the developer and the homeowners association.

The court noted that 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, was against the developer.

ANALYSIS

Perhaps the most significant aspect of this case is the final holding that when a contracting party is obligated to get insurance but fails to do so, the “uninsured party’s remedy is breach of contract against the party that was supposed to get the coverage — not a claim against a broker or insurer.”