CHECK MUNICIPAL LAW, BEFORE YOU PROCLAIM OHIO LAW PROVIDES NO DUTY TO REMOVE ICE AND SNOW

It is not surprising that in Ohio, we have a lot of “ice and snow cases”, because… we get a lot of ice and snow. I know, the nerve of me to bring this up in August, but the recent Ohio Court of Claims case, Scolaro v Ohio University (Case No. 2015-00304-August 11, 2015) reminds us that: 1) odds are good that it will snow again in a few months; and 2) there are exceptions to the “no duty to remove natural accumulation of ice and snow, general rule.” 

The leading case of the “no duty to remove natural accumulation of ice and snow general rule” is Brinkman v. Ross, 68 Ohio St.3d 82 (1993). In Brinkman, 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 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."

While the rule of law in Brinkman seems clear, judicial decisions are no different than the seemingly clear wishes of Aladdin’s genie which came with a few “exceptions, provisos and quid pro quos.” The case in Scolaro reiterates the “statutory law exception” to the “no duty to remove snow and ice general rule” in Ohio. Basically, in cases where a municipality or local government has a law requiring snow and ice removal, there is a statutory duty to remove, failing which will render the offender negligent per se (a basic legal principle basically holding that violation of  a criminal law that assesses penalties = negligence).  

In Scolaro, Hannah Scolaro of Akron sued Ohio University in the Ohio Court of Claims after she fell on the ice (on a campus bus-stop sidewalk) and damaged her front teeth, resulting in root canals, crowns and other dental work totaling approximately $3,000. Scolaro claimed the school was negligent for failing to remove snow and ice on its sidewalks, and asked the court to make the school pay for her dental bill. Apparently, other sidewalks on campus had been salted, but not the bus-stop sidewalk.

The Ohio University claimed Scolaro should have been aware of weather hazards and taken better precautions. Legally, the university relied on the Ross decision. Scolaro argued that the school should have done a better job protecting the safety of its students, especially when there is a law requiring them to do so. The Court of Claims agreed with Scolaro. According to the court, “While Ross remains the law in Ohio, there is an exception. Ross is limited in cases where a municipality or local government has enacted a safety statute requiring snow and ice removal. Athens, where OU is located, is one of these municipalities.”

What is the moral of this story? When it snows again, don’t forget the exceptions, provisos and quid pro quos to the “no duty to remove accumulations of ice and snow general rule” of Ross v Brinkman. Basically, they are: 1) the statutory law exception of Scolaro v Ohio University; 2) a lease or other contract may create a duty/obligation to remove ice and snow; 3) if you undertake to remove snow/ice, you can be held liable if you do so negligently, or in a way that makes the area more hazardous than it had been without your efforts at snow removal; and 4) you may be held liable for unnatural accumulations of ice which result, for example from the negligent design of a parking lot (See Cain v. McKee Door Sales, 2013-Ohio-4217).

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.”

Closing Protection Coverage-A Somewhat Distasteful but Advised Insurance Product

I sometimes wonder, how much wealthier I would be if I never paid for title insurance, homeowner’s insurance, commercial property insurance…  In the last 25 years or so, my house has never gone up in flames, no neighbor ever came by and said they own half my property, and when I owned rental properties, no floods or hurricanes swept them away. I have definitely paid out more in premiums over the years, than the insurance companies have paid me, and I get tired being one of the reasons that many insurance companies are doing well these days. I presume many of our Blog readers feel the same way. 

On the other hand, I presume that not many of us have made the Forbes List of the World’s Wealthiest People, and if our luck changed, few of us would be able to recover from an uninsured casualty that destroyed the home we live in or other major asset. No matter how low the odds may be that our home or commercial building will be destroyed, or that after a closing we’ll find out that someone else owns our property (or has a lien against it), or has stolen our funds from escrow, it almost always makes sense to insure against the loss, unless we can afford to self-insure. The reason is that most real estate related insurance (property, title) is relatively (in comparison to the risk of loss) inexpensive, and required by any lender financing real property.

While the State of Ohio has a formal fee schedule for title insurance, title insurance for most deals should not exceed $5-6/$1,000. Title insurance is designed to protect an owner's or a lender's financial interest in real property against loss due to title defects, liens or other title related matters. If there was a recorded highway easement across your property that the title company missed, or your home got sold at a tax sale, without your seller’s knowledge, or someone forged your seller’s name to a deed and sold the property to a third party, or someone accidentally placed a lien against your property (Lot 431) when they really meant to place the lien on Lot 341, you’ll be glad you bought title insurance.

What if an independent agent for your title company was also your escrow agent (which is very common), and that agent took the buyer’s funds and retired to Mexico (becoming more and more common). You are covered, right, because you took everyone’s advice and bought title insurance?

Unfortunately, no, unless you bought “Closing Protection Coverage”. Title agents are just that, agents to sell title insurance. The title agent is NOT an agent of the underwriter for escrow, closing and disbursement of funds purposes, so the insurance underwriter is not liable for such independent agent’s fraud or failing to adhere to escrow instructions, if such coverage is not in effect.

What is Closing Protection Coverage? It is basically (via issuance of a Closing Protection Letter) insurance that will bind the title underwriter to cover you in the event of a loss due to "theft misappropriation, fraud, or other failure to properly disburse settlement, closing or escrow funds..." by the licensed agent.

Is Closing Protection Coverage (“CPC”) required? There is no requirement that CPC be procured, but, pursuant to Section 3953.32 of the Ohio Revised Code (effective January 1, 2007) Ohio law now mandates that closing protection coverage be offered to all parties in a closing transaction – the seller, the buyer, and the lender.

How much does CPC cost? Rates for Closing Protection Coverage in Ohio are now (updated in 2013) as follows:

• $40 for a lender, its successors/assigns
• $55 for seller(s)
• $20 for buyer(s)/borrower(s)
• $20 for each additional title insurance applicant.

Is CPC advised? In light of its low cost, relative to the potential loss (my initial research indicates recent closing agent fraud claims ranging from $12,000 to $27,000,000), yes.

Certainly, you can reduce the risk of fraud/negligence by using an agency that has worked well for you in previous deals. When faced with the prospect of a new agent, it is important to ask about the agency’s experience, how long they have been in business, the qualifications of its personnel, and whether or not any claims have been made against the agency in the past. While you can lower the risk by carefully selecting the agent, the only way to eliminate the risk is to buy the coverage.  You don’t have to be happy about it. Most who buy the coverage are not. In one sense, CPC can be analogized to a protection racket that Tony Soprano would be proud of. As Robert Franco, in his “Source of Title Blog” (www.sourceoftitle.com/blog) characterized the coverage, “you [agents] have to tell them [customers] that there is a chance that you may steal their money and in order to be protected from your dishonesty, they must pay extra.” 

While I sympathize with the bad taste one gets when trying to rationalize CPC, the bottom line is that you can pay next to nothing at closing, or pay out up to everything you own, later.

Commercial Real Estate Lease Insurance Provisions: A Primer

Insurance and Subrogation and Indemnification, oh my. While not as scary as lions and tigers and bears, the insurance provision in a commercial lease is a difficult “animal” to comprehend. The following presents a non-exhaustive summary of the pieces often found in the “insurance provision puzzle”.

(a) Coverage. If the insurance provision in a lease form you are presented with requires the tenant to procure “fire and extended insurance coverage”, you have an old lease form, or, are dealing with a party who is unaware that commercial lease insurance has evolved over the years. The “Cadillac of commercial property insurance” these days (and the insurance that 99.9% of landlords will require) is the “special causes of loss form (CP 10 30)” which provides what is referred to as “all risks coverage” (coverage for loss from any cause except those that are specifically excluded). The other two Insurance Services Office (“ISO”) causes of loss forms are the “basic causes of loss form”, and the “broad causes of loss form”. These forms provide what is referred to as “named perils coverage” (coverage for loss from only the particular causes that are listed in the policy as covered).

The above-named policies can cover physical damage and destruction to the landlord’s building and fixtures, as well as tenant improvements and personal property therein. As a general rule, tenants leasing an entire building will be responsible to procure property insurance for landlord’s building, as well as tenant’s personal property therein. In a multi-tenant situation, landlords typically procure the building insurance (and charge same back to tenants in a net lease) with tenants being responsible to insure their personal property. Commercial lease tenants are also typically required to provide some or all of the following insurance products:

 

1)                  public liability insurance (including insurance against contractual or assumed liability of the tenant under the lease) providing coverage against bodily injury to or death of persons, and damage to property (One Million to Three Million is typical); 

2)                  workers' compensation insurance covering all employees in the premises and/or all persons employed in connection with any work performed by the tenant in the premises; 

3)                  business interruption or loss of income insurance in an amount equal to the fixed rent payable under the lease for a certain number of months;

4)                  plate glass insurance; and

5)                  any insurance policies designated necessary by the landlord with regard to any tenant build-out of the premises including "all risk" builders' risk insurance.

Landlords are typically required to maintain special form (all risks) insurance for the building in amount not less than 80% of replacement value, and comprehensive general liability insurance in the range of One Million to Three Million, depending on the size/nature of the property. In some landlord form leases, however, a requirement for landlord’s insurance is often nowhere to be found. While a landlord of a multi-tenant facility would be crazy not to insure, without detailing the coverage in the lease, tenants might be unpleasantly surprised to learn (after the fact) that the landlord has a high deductible (for example, with a $25,000 “deductible”, the building is essentially non-insured for the first 25K of any claim), or low coverage limits. Tenants in a multi-tenant facility should always require the landlord to maintain adequate insurance coverage, and detail same in the lease.

 

(b)        Mutual Waivers of Claims/Mutual Waivers of Subrogation. If insurance coverage issues boggle the mind, the issues presented with other parts of the “commercial lease insurance puzzle” (and their interplay) can send one over the edge. These provisions, when drafted correctly are mutually beneficial to the landlord and the tenant. Accordingly, it makes sense to understand them. We will just cover the basics, here, as there are entire seminars and publications dedicated to commercial lease insurance.

 

The basic theory is simple enough. Typically, the landlord and tenant insure their own property; often for the full replacement value. Based on fundamental fairness, if, for example the landlord receives insurance proceeds due to fire damage to its building caused by the negligence of the tenant, there should be no need for the landlord to sue the tenant, since the landlord has been compensated. Reverse the roles, and the same holds true. Accordingly, the insurance provision should contain such a mutual waiver whereby landlord and tenant waive claims they have/will have against each other (regardless of fault) if they are compensated by insurance.

 

A problem arises, however if the mutual waiver only involves landlord and tenant, and not their respective insurance companies. Basically, insurance companies that pay off claims, like to try and get their money back. The insurance contract’s “right of subrogation” (if not waived) would allow the insurance company to step in the shoes of the landlord in the above example, and sue the tenant to get back the money it paid on the landlord’s claim (even if landlord waived its right to sue the tenant).

 

The way to combat this anomaly is to provide for a mutual waiver of subrogation in the lease (in addition to the mutual waiver between landlord and tenant). In such a provision, both parties will agree to procure a special type of endorsement on a property-casualty insurance policy, aptly named a “Waiver of Subrogation”. The Waiver of Subrogation prohibits the insurer from attempting to seek restitution from a party who causes any kind of loss to the insured.

 

Further issues to consider regarding waivers of subrogation are: 1) Will the waiver apply to the extent of insurance proceeds received, to losses the lease requires to be covered by insurance, or to all losses; and 2) Will the waiver apply to liability insurance policies, as well as property insurance policies. If not, the parties should require that they be named as an additional insured on each other’s liability insurance policy.

 

(c) Indemnifications. Most landlords (and attorneys representing landlords) believe in landlords and tenants waiving claims against each other, based upon the principles of fundamental fairness and today’s reliance on insurance to compensate for losses. However, when a third party is injured, for example, and sues the landlord, allocation of risk and defense costs seem to take precedence over fairness. In a typical lease indemnity clause, a party agrees to pay the liability, and in some cases the defense costs and damages, of the other party if a claim is asserted by a third party. Tenants should insist the indemnification be subject to the waiver provisions, to avoid the landlord receiving a “double recovery”. Tenants should also not be bashful in seeking indemnification from the landlord, at least with regard to landlord’s operation of any common areas.

 

                        One of the greatest challenges in lease negotiation, especially with regard to insurance provisions is to understand and respect the interplay of insurance coverage, waiver and indemnification issues, and to maintain internal consistency within these provisions. Landlords and tenants should not hesitate to consult with their brokers, insurance agents and attorneys when reviewing commercial leases, especially with regard to the often overlooked but always important insurance provisions.

 

CLE Updates: Solar Leases and Certificates of Insurance

My Legal Conferences is sponsoring a webinar titled "Certificates of Insurance: Critical Coverage Issues You Need to Know" on September 11, 2012 from 1:00 pm to 2:00 pm EDT (10:00 am to 11:00 am PDT).  Click here for more information

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Strafford Publications is sponsoring a phone/webinar titled "Solar Leases: Legal Considerations for Property Owners" on September 12, 2012 from 1:00 pm to 2:30 pm EDT (10:00 am to 11:30 am PDT). Click here for more information.

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Certificates of Insurance -- what are they and when do we use them?

A certificate of insurance is a document that provides information about insurance policies.  In the US, millions of insurance certificates are issued every year.  Most of the certificates are issued upon a policy renewal to provide information regarding the renewal to third parties (e.g., landlords, lenders).  Certificates of insurance list out the various lines of insurance that a policy holder carries, the limits associated with each of these coverages and the identifies the insurer providing the coverage.

Here are some examples of when a policyholder might request a "certificate of insurance":

• The policyholder is a tenant and the landlord is requesting evidence of liability insurance (and possibly also property insurance if the lease places that responsibility on the tenant)
• The policyholder is mortgaging real property and the lender requires information regarding the existence of property insurance at closing on the loan and upon each renewal
• The policyholder has leased equipment and the owner of the equipment wants to verify that the existence of property insurance while the equipment is in the policyholder's possession
• The policyholder needs evidence of workers compensation insurance to comply with a contract obligation or in bidding for a contract

A certificate of insurance is not an insurance policy; it merely provides information about policies that a policyholder has.

Typically there will be one certificate for liability insurance and a separate certificate for property insurance.  This is due to the fact that a standard property insurance policy obligates the insurer to notify the mortgage holder in the event of policy cancellation.  However, a typical liability policy only obligates an insurer to notify the first named insured and no one else of policy cancellation, unless the policy is endorsed to provide notice to another party.  Often the certificates of insurance used in connection with loan financing are issued on ACORD 27 and 28 forms. These 2 forms are designed for delivery to parties that have a financial interest in the property covered by the policy listed on each. These parties are typically lending institutions and they prefer the title "Evidence of Insurance".  Substantively, however, these forms are still certificates of insurance.

"ACORD" stands for Association for Cooperative Operations Research and Development, and is a global, nonprofit standards development organization serving the insurance industry and other related financial services industries.