Aladdin and the Vacancy Exclusion

On one level, the granting of Aladdin’s wishes by the Genie is a lot like insurance coverage today.

“Aladdin: You're gonna grant me any three wishes I want, right?

Genie: Uh, almost. There are a few, uh, provisos, a, a couple of quid pro quos.”

When you make a wish for insurance with your agent, the provisos and quid pro quos are the policy limits, deductibles and exclusions.

One very typical exclusion in all commercial insurance policies (and Homeowners policies) is the vacancy exclusion. The simple reason this exclusion exists is that vacant buildings are more prone to arson, theft, vandalism and property damage.

The problem is that while the vacancy exclusion is typical, the commercial insurance definition of “vacant” is atypical. When most of us think of “vacant”, we think of “empty” or devoid of everything and everyone.

In many commercial policies, a building is considered vacant if 31% or more of its total square feet are un-occupied and the operations conducted are not those customary to the use of the building. In such policies, if a building is “vacant” more than sixty days, no coverage will be provided for vandalism, sprinkler leakage, water damage, theft, or attempted theft.

In such policies, it is the definitions within this specialized definition of “vacant” that have proven to be most problematic (at least in the eyes of the insured).

The recent case of Nationwide Mut. Ins. Co v Pinnacle Baking Co., Inc., 2014-Ohio-1257 presents a good example of the issues with vacancy exclusions and their interpretations by Ohio courts.

In Pinnacle, Nationwide insured Pinnacle Baking Co., Inc. through a Business Owners Policy of Insurance. Pinnacle operated a commercial bakery in a building it leased in Columbus, Ohio. Pinnacle ceased business operations in the building in 2008. In 2010, the building was broken into and a freezer, refrigerator, computer, fryer, glazing machine and other equipment was stolen.

In 2011, Pinnacle submitted a proof of loss to Nationwide, claiming $103,000 in stolen goods. Nationwide refused to pay the claim, and Pinnacle sued.  Nationwide asserted that the policy did not cover the 2010 loss, as the property was vacant under the terms of the policy. Pinnacle asserted that the vacancy exclusion in the policy was inapplicable, as Pinnacle kept all of the equipment necessary for a commercial bakery in the building, and "would have been baking again immediately with a quick trip to Kroger for eggs, flour and oil." Nationwide noted that, while Pinnacle had some appliances and equipment in its building, it did not possess the raw materials which were necessary to produce baked goods.

The trial court stated that "[w]hile defendant did not have every item of personal property in the building to conduct customary operations, the policy contains no such requirement” and “Defendant had enough personal property in the building to conduct customary business operations at any time." Accordingly, the trial court determined that the building was not vacant, and Nationwide should pay the claim.

Nationwide asserted on appeal that the trial court erred in finding that the building was not vacant. Nationwide claimed that the building did not contain enough business personal property to engage in customary operations, that the vacancy exclusion to coverage applied, and that Pinnacle was therefore not entitled to coverage under the policy.

The 10th District Court of Appeals recognized that since the facts were not in dispute, the sole issue between the parties was whether or not the Premises were vacant as defined in the insurance policy.

As a guide to define such policy, the court of appeals first summarized the law regarding how insurance contracts are to be construed. “Insurance contracts are construed using the same rules as other written contracts … where the policy’s language is clear and unambiguous, the court may not ‘resort to construction of that language …the words and phrases used in the policy must be given their natural and commonly accepted meaning… [while] ambiguous provisions—particularly provisions purporting to exclude or limit coverage— must be construed strictly against the insurer and liberally in favor of the insured, the mere absence of a definition in an insurance contract does not make the meaning of the term ambiguous.”

Next, the court of appeals examined the specific language of the policy. The vacancy exclusion in the policy provided that, where the "building where loss or damage occurs has been vacant for more than 60 consecutive days before that loss or damage occurs, Nationwide will not pay for loss or damage resulting from vandalism, sprinkler leakage, building glass breakage, water damage, or theft.” The policy further provided that the building would be considered vacant “when it does not contain enough business personal property to conduct customary operations." The policy defined business personal property located in the building as consisting of: “(1) Personal property you own that is used in your business, including but not limited to furniture, fixtures, machinery, equipment, and stock.” “The policy defined "stock" to mean "merchandise held in storage or for sale, raw materials and in-process or finished goods” and "operations" to mean "your business activities occurring at the described premises." The phrase "enough business personal property" was not specifically defined in the policy.

Taking into account the rules of construction and the exact wording of the policy, the court of appeals reasoned that it did not need to determine the meaning of “enough” personal property, because the building did not have a key element of the definition of personal property at the premises: “stock”, to conduct customary operations. The evidence demonstrated that Pinnacle did not have raw materials on site (e.g. eggs, flour, and butter) for it to produce any baked goods.

As such, the court held that “based on the evidence in the record, we are constrained to find that the building was vacant within the terms of the policy.”

What is the moral of this story? Read your insurance policies, and ask your agent to clearly explain all of the provisos and quid pro quos, or your wish for insurance may not come true. Had Pinnacle not vacated its refrigerator, it might have had coverage for its loss.

In addition to understanding how vacancy is defined, the exceptions to the vacancy exclusion must also be clearly understood. In many policies, if a building is under construction or renovation, the building won’t be considered “vacant.” However, in Suder-Benmore Co. Ltd. v. Motorists Mut. Ins. Co., 2013-Ohio-3959 (6^th Dist. Ct. of Appeals, Lucas County) the court concluded that planning to renovate did not suffice to meet the definition of renovation. The plaintiff  in Suder-Benmore had begun the process of renovating its space from a party center to a sports bar by hiring an architect, cleaning, hiring a manager for the property, obtaining necessary government approvals, and removing a stage and coat racks. No actual work, however had begun. The court also concluded that the work planned would be considered “remodeling” and not “renovating.”