The California Supreme Court has ruled that when a vacancy exclusion is subject to an exception for a building “under construction,” the exception applies not only to new construction but to renovations and additions, provided the work requires the substantial and continuous presence of workers at the site. ( TRB Investments, Inc. v. Fireman’s Fund Insurance Company (2006) 2006 WL 3257848)
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. Thus, 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.
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. However, the California Supreme Court reversed.
Holding
According to the Supreme Court, the purpose of a vacancy exclusion is to prevent vandalism and to ensure prompt discovery of other types of damage. Thus, the Court held an exception for a building “under construction” applies not only to construction of a new structure, but to renovations of or additions to an existing structure, provided the work requires the substantial and continuing presence of workers at the premises. If a construction project results in the continuous and substantial presence of workers on the property, then the underlying justifications for the vacancy exclusion no longer exist.
Comment
There is a split in authority among other courts around the country, with some finding that a building undergoing renovation is “under construction,” and some finding a building undergoing renovation is not “under construction.” The California Supreme Court’s holding makes it clear that, irrespective of whether the work is characterized as new construction, renovations or additions, the critical issue is whether the work requires the substantial and continuing presence of workers at the premises.