Travelers Property Casualty Company Of America v. Superior Court (Braum)

(Vacancy Exclusion in HOA Policy Barred Coverage of Property Theft Claim Involving a Condominium Development)

In Travelers Property Cas. Co. of America v. Superior Court (Braum Real Party-In-Interest), 215 Cal.App.4th 561 (April 17, 2013), the California Second District Court of Appeal issued a writ of mandate requiring the trial court to enter summary judgment in favor of Travelers Property Casualty Company of America (“Travelers”) and insurance broker, Koram Insurance Center, Inc. (“Koram”) in connection with a claim for theft of property from an unfinished condominium development. The claimant, Michael M. Braum, Trustee of the Braum Lalehzarzadeh Living Trust (“Braum”) had purchased a note issued by the lender for the construction project, East West Bank (“EWB”). The note had been issued in connection with a $4.5 million construction loan paid to developer, Joy Investment Group (“Joy”), in order to construct a 13 unit condominium project (“Project”) in Los Angeles. Under the construction loan agreement, Joy promised to maintain fire and other risk insurance as the lender may require with respect to borrower’s properties and operations in forms, amounts, coverages and with insurance companies acceptable to the lender. The agreement also required the borrower to provide the lender with lender’s loss payable and other endorsements as the lender may require. In addition, Joy executed a separate agreement to provide insurance in connection with the loan.

Construction of the Project began sometime in 2005. At some point in 2008, Joy obtained its insurance from Koram which placed its 2008 policies with Underwriters at Lloyd’s of London. Koram issued certificates of insurance indicating that EWB, its successors and/or assignees was named as a mortgagee and, in some cases, as an additional insured. The last of the Lloyd’s policies was effective from October 1, 2008 through January 1, 2009.

In November 2008, Joy was in default on the construction loan. During this time period, Braum purchased the note for the loan from EWB.

In December, 2008, Joy spoke with Koram regarding new insurance. It was undisputed that Jay No, a member of Joy, informed Koram that several of the units at the property had buyers and were in escrow and that Joy had recently created a homeowners association for the condominium complex (“HOA”). Consequently, No and Koram then discussed obtaining an insurance policy for the HOA instead of the type of vacant building policy previously issued by Lloyd’s with Joy as the named insured. Ultimately, a written proposal was prepared by Koram concerning a Travelers HOA policy conditioned upon 80% of the condominium units being sold and occupied.

Travelers issued an HOA policy on January 15, 2009 for the period for January 1, 2009 to January 1, 2010. The policy included a vacancy exclusion set forth in the first party property coverage for the buildings comprising the HOA project:

The vacancy exclusion at issue in this case is part of the businessowners coverage. The policy identifies the Covered Causes of Loss, as “RISKS OF DIRECT PHYSICAL LOSS unless the loss is:

¶a. Limited in Paragraph A5., Limitations; or

¶b. Excluded in Paragraph B., Exclusions. “The limitations paragraph, A.5, follows immediately. The vacancy clause is the fourth limitation therein. It states, 'We will not pay for any loss or damage caused by any of the following, even if they are Covered Causes of Loss, if the building where loss or damage occurs has been 'vacant' for more than 60 consecutive days before that loss or damage occurs: ¶ (I) Vandalism; ¶ . . (b) Used by the building owner to conduct customary operations.”

At some point in February 2009 there was a loss at the property purportedly caused by vandalism or theft. Specifically all of the appliances, toilets, faucets and air conditioning returns were removed from the units. At the time of the loss, it was undisputed that nobody lived in the units at the Project. Further, a Certificate of Occupancy had not yet been issued for the property. As such, none of the units were sold or occupied at the time of the loss.

Effective March 15, 2009, Travelers cancelled the policy due to Joy’s nonpayment of the premium. Subsequently, on April 6, 2009, Joy filed a voluntary petition in bankruptcy. At some point thereafter, the property was lost to Braum through foreclosure. As of February 2012, a Certificate of Occupancy still had not been issued for the property.

On September 15, 2010, Braum submitted a claim to Travelers for the purported vandalism loss which had occurred in February 2009. By letter dated December 20, 2010, Travelers denied the claim, on the basis that the property had been vacant for more than 60 days prior to the vandalism.

Thereafter, Braum filed a lawsuit against Travelers and Koram. The lawsuit alleged causes of action against both defendants for breach of contract, professional negligence and fraud. Braum did not deny that the property was vacant at the time of the vandalism. Instead, he alleged that Koram and Travelers were estopped to deny coverage on the basis that the property was unoccupied as they failed to determine if the property was actually occupied prior to binding insurance. Braum also alleged that Koram had been aware of Joy’s insurance obligations to EWB, and that Braum, as EWB’s assignee, was the intended third-party beneficiary of any contract for Koram to provide insurance for the property.

In response, Travelers filed a motion for summary judgment arguing that the vacancy exclusion in the HOA policy barred coverage of the claim. Travelers also argued that it was not vicariously liable for Koram’s alleged professional negligence based on the absence of a duty owed by Koram to Braum. In addition, Koram also filed a motion for summary judgment arguing that it owed no professional duty to Braum. The trial court denied both motions.

Subsequently, Braum and Travelers filed petitions for writ of mandate requesting the Court of Appeal to direct the trial court to enter summary judgment in their favor.

In directing the trial court to enter summary judgment in favor of Travelers, the Court of Appeal held that the vacancy exclusion in the Travelers’ policy unambiguously barred coverage of Braum’s claim based on the undisputed fact that the Project was empty at the time of the alleged property theft. The Court of Appeal stated as follows:

We repeat the relevant language. The limitation clearly states, among other policy limitations: “We will not pay for any loss or damage caused by any of the following, even if they are Covered Causes of Loss, if the building where loss or damage occurs has been 'vacant' for more than 60 consecutive days before that loss or damage occurs: (6) Attempted 'theft.” Assuming, for the moment, that the property was, in fact, vacant, the limitation on coverage clearly applies. The language is conspicuous, appearing in the list of policy limitations, immediately following the grant of coverage. It is also plain and clear: if the property has been vacant “for more than 60 consecutive days before” the vandalism or theft, there is no coverage for the vandalism or theft there is no coverage for the vandalism or theft.

In this case, the trial court relied on an interpretation of the language to which it is not reasonably susceptible. The court concluded that the period “for more than 60 consecutive days before” the vandalism must, in fact, commence at or after policy issuance. There is no limitation in the clause which so states, nor is there any language in the clause which permits such an interpretation. Some courts have found that a vacancy period must commence at or after policy issuance when it indicates that the clause is triggered if the property is vacant “’beyond a period of sixty days,'“ (emphasis added) on the theory that the use of “beyond” is prospective-looking and must therefore commence at or after policy issuance. However, when the policy language is defined in terms of “days before loss,” the time period is clearly backward-looking from the date of the loss, and does not implicate policy issuance. (Gas Kwick, Inc. v. United Pacific Ins. Co. (11th Cir. 1995) 58 F.3d 1536, 1539.) There is no ambiguity in the instant policy; the period is backward looking from the date of the loss.

Moreover, we reject the trial court's conclusion that the vandalism coverage was illusory if the limitation was triggered by a 60-dayvacancy period prior to the issuance of the policy. At the time the policy was issued, it was intended to run for the entire year; 10 of 13 units were in escrow, and the HOA reasonably anticipated the units becoming occupied early in the policy period. Thus, the HOA purchased a policy which provided many other coverages immediately, and was expected to provide vandalism coverage shortly into the policy period. We see no reason why a partial coverage, which was anticipated to be triggered at some point later in the policy period, would be considered illusory simply because it was not active at the time of policy issuance.

We next turn to the meaning of “vacant,” which is itself defined, in the conspicuous “Property Definitions” section of the policy, as follows: “(1)When this policy is issued to a tenant, and with respect to that tenant's interest in Covered Property; building means the unit or suite rented or leased to the tenant. Such building is vacant when it does not contain enough business personal property to conduct customary operations. (b) Used by the building owner to conduct customary operations.”

It cannot reasonably be disputed that the insured, the HOA, was the owner of the building and not a tenant. As such, we must determine whether at least 31% of its square footage was rented and used by tenants, or whether at least 31% of the building was used by the HOA to conduct customary operations. Neither is true. It is undisputed that none of the units were sold; it is clear that none were rented and being used. Moreover, the HOA was not using any of the building for any purpose; the construction was still being completed. Braum suggests that “it is a fair interpretation of the exclusion that, for the exclusion to be applicable, the building must be completed . . .” We disagree. In TRB Investments, Inc. v. Fireman's Fund Ins. Co., supra, 40 Ca1.4th 19, our Supreme Court addressed a vacancy exclusion which contained an express exception stating that buildings under construction are not considered vacant (Id. at p. 22.) Such an exception was not present in the vacancy exclusion or elsewhere in the instant policy, and we cannot change the clear and plain language of the policy to provide coverage where none was intended. (Belgrade v. National American Ins. Co. (1962) 204 Cal.App.2d 44, 47.) In short, the property was indisputably vacant for 60 days prior to the loss, and the exclusion clearly applies. As such, Braum cannot proceed against Travelers on his breach of contract cause of action.

The Court of Appeal also issued an order requiring the trial court to enter summary judgment in favor of Koram based on its determination that Koram did not owe a duty of care to Braum as Koram purchased the insurance requested by the insured, Joy.