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.”

Ohio Snow and Ice; to Remove or not to Remove, that is the Question

(assuming you can get out of your drive)

As we dig out from under our latest snowfalls, it seems appropriate to summarize the relatively recent Franklin County Court of Appeals decision in Cain v. McKee Door Sales, 2013-Ohio-4217, and other cases dealing with premises liability for injuries due to accumulation of ice and snow.

As aptly pointed out by the Court in Cain, “the Supreme Court of Ohio has made liability [in snow and ice cases] very hard to establish.” In Brinkman v. Ross, 68 Ohio St.3d 82 (1993; the leading case on this issue), the Ohio Supreme Court held: the “homeowner has no common-law duty to remove or make less hazardous natural accumulation of ice and snow on private sidewalks or walkways on homeowner's premises, or to warn those who enter upon premises of inherent dangers presented by natural accumulations of ice and snow, regardless of whether the entrant is a social guest or business invitee.”

In the Brinkman case, the Brinkmans were invited to the Ross home during the winter. The Rosses knew that the sidewalk into the house was covered by a sheet of ice, which in turn was covered by snow, but never warned the Brinkmans. While walking on the sidewalk between the driveway and the Ross home, Carol Brinkman slipped on the snow-covered ice and fell, sustaining serious injuries. Ms. Brinkman sued and lost at the trial court stage, but appealed that decision. The court of appeals in Brinkman agreed with the plaintiff who admitted the snow/ice had accumulated naturally, but claimed the Rosses had a duty to disclose the dangerous situation that they knew about. 

The Ohio Supreme Court in Brinkman reversed the decision of the appellate court on the basis of law, and common sense, as if to say: “Who does not know that snow and ice are slippery?”  Actually, the Ohio Supreme Court put it more eloquently, by stating: “As a matter of law, the guest is charged with sufficient knowledge of the hazards to be required to protect herself against falls."

The facts of the case in Cain are a little more involved. Betty Cain fell on snow and ice in the parking lot at the office of her eye doctor. She was seriously injured, and as a result, she sued various entities affiliated with the office building. In her affidavit, Ms. Cain stated that she approached her car from the rear, and as she was reaching for her door, she slipped and fell on the snow and ice that had accumulated in the drainage swale of the parking lot.  While the basic facts in Cain are somewhat similar to the basic facts in Brinkman, counsel for Ms. Cain argued that the construction of the parking lot was improper or improperly designed, resulting in a trough (or swale) in the parking lot which accumulated snow, ice and water in what constituted an unnatural accumulation. Experts testified to this “unnatural phenomenon”. The trial court relied on Brinkman, and granted summary judgment in favor of the defendants. Ms. Cain then appealed.

In reversing the trial court’s summary judgment, the Franklin County Court of Appeals held that there was a genuine issue of material fact as to whether or not Ms. Cain fell on an unnatural accumulation of ice which resulted from the design of the parking lot, and accordingly remanded (sent back) the case to the trial court for further appropriate proceedings. In other words, the court of appeals simply recognized that there is an exception to the rule (for “unnatural accumulations”) and awarded the defendants their day in court to try and prove it.

Would these cases have come out any different in a landlord-tenant situation? Based on Ohio case law, probably not, with two exceptions.  One, if the landlord has promised in its lease to clear snow and ice from the premises, then yes, the landlord can be sued if he fails to live up to his contractual obligations. Two, if a landlord decides to remove ice and snow, without an obligation in the lease to do so, he then has a duty to use ordinary care not to create a hazard or to aggravate an existing hazard. Such a hazard would constitute an unnatural accumulation.

Actually, whether or not in a landlord tenant situation, anyone that undertakes to remove snow/ice can be liable for a slip and fall if they have done so negligently, or in a way that makes the area more hazardous than it had been without the efforts at snow removal.

What is the moral of this story? Never shovel or “de-ice”? There are some who subscribe to that theory. However, before you decide to take such an approach, you should note:1) A lease or other contract may create the duty/obligation to remove ice and snow; 2) your applicable municipality may have snow removal ordinances. If your city or township has such an ordinance that requires you to keep walkways free of snow and ice, then you have a responsibility to maintain the same. In fact, some Ohio cities with snow removal ordinances levy fines for not removing snow in a timely manner; and 3) if you have a good insurance policy, why not listen to your mother and be nice to your neighbors.

Defective Construction Claims: Are They Covered Under the CGL Policy or Not?

One area that is often argued are claims for defective construction under builders' commercial general liability insurance policies. This is an issue that equally affects a builder, a damaged party and the insurer, and how that issue is decided may depend on which state's law will control.

The issue involves whether defective construction constitutes an 'occurrence' under a CGL policy and if so, under what circumstances.

The Ohio Supreme Court addressed the issue in 2012 in Westfield Ins. Co. v. Custom Agri Systems, Inc. (2012 Ohio 4712) and held that faulty workmanship in and of itself is not enough to be considered an 'occurrence' under a CGL policy.  However, damage to property caused by the defective workmanship may be covered.

Ohio's approach is fairly strict compared to recent decisions in other states on this issue. A policyholder in Connecticut, Georgia, North Dakota or West Virginia might have better odds of making a successful claim given the more expansive interpretations that have come out of those state courts.

However, before policyholders start doing their happy dance...in all of these states, Ohio included, the rulings typically just addressed what constitutes an 'occurrence' under a CGL. Other exclusions or policy language may still preclude a claim.
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