The California Court of Appeal has ruled that a building under renovation is not “under construction,” and that damage that occurs while the building is vacant does not fall within an exception to a vacancy exclusion. ( TRB Investments, Inc. v. Fireman’s Fund Insurance Company (2005) 130 Cal.App.4th 1594)
Facts
TRB Investments, Inc. purchased a tenant-occupied commercial building, and insured the building through Fireman’s Fund. Upon termination of the lease, the tenant vacated the building.
Several months after the initial tenant vacated the building, TRB entered into a lease with a new tenant. The new lease agreement provided that, before the new tenant moved into to the building, TRB would make various renovations. TRB hired a general contractor, who began the renovations.
Over a period of two weeks, subcontractors worked on the building’s electrical system and air conditioning system. During a weekend, when no work was underway, a water heater failed, causing extensive water damage to the building.
The policy contained an exclusion that eliminated coverage for certain kinds of damage (including water damage) if the building had been “vacant” for more than 60 days prior to the loss. The policy defined a building as “vacant” if it did not contain enough business personal property to conduct customary operations. It was undisputed that, at the time of the loss, the building did not contain enough business personal property to conduct customary operations.
However, the exclusion also contained an exception that provided that a building “under construction” was not vacant. TRB asserted the building was “under construction” because of the renovations and that, therefore, the exception to the exclusion applied. Fireman’s Fund disagreed, and denied TRB’s claim. TRB sued Fireman’s Fund, but Fireman’s Fund prevailed in the trial court and in the California Court of Appeal.
Holding
The Court of Appeal held that a building undergoing renovation is not “under construction” within the meaning of the exception to the exclusion. The Court held that the term “under construction” applies to construction of a new structure, not to renovation of an existing structure.
According to the Court of Appeal, the purpose of the vacancy exclusion is to prevent vandalism and to ensure prompt discovery of other types of damage. The Court reasoned that buildings that are under construction usually have workers present on almost a daily basis, which deters vandalism and allows for relatively quick discovery of other types of damage.
The test, according to the Court of Appeal, is whether the building is complete enough so that its intended occupants can occupy it. The Court concluded a building under renovation is one that presently can be occupied, but nonetheless requires some repairs and improvements in order to meet the needs of the intended occupant.
Comment
This is the first case in which a California appellate court has issued a reported decision interpreting the meaning of the term “under construction” in an exception to a vacancy exclusion. There is a split in authority among other appellate courts around the contrary, with some finding that a building undergoing renovation is a building “under construction,” and some finding a building undergoing renovation is not a building “under construction.”