Insurance company must pay water damage claim

TRB Investments owns an empty former bank building that it leased to Goodwill Industries. Before the tenant could move in, however, TRB had to extensively renovate the building.

From June 29 to July 14, TRB’s electrical subcontractor performed electrical work, and the heating, ventilation and air-conditioning (HVAC) subcontractor tested the units.

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On the morning of July 16, workers discovered a water heater or waterline on the third floor had burst, causing significant water damage. The burst occurred sometime between July 14 and July 16.

TRB filed a water damage claim with Fireman’s Fund Insurance Co., which held a property insurance policy on the premises. But Fireman’s Fund denied coverage, arguing the 60-day vacancy clause in the policy applied.

Due to the higher risk of loss from vandalism, theft and water damage for a vacant property, the insurer explained, most insurance policies contain similar coverage exclusions for vacant properties.

But TRB argued the policy also says, “Buildings under construction are not considered vacant,” so Fireman’s Fund should pay for the water damage, and the 60-day vacancy exclusion should not apply. The insured refused to pay. TRB sued Fireman’s Fund.

If you were the judge would you rule a building undergoing renovations meets the “under construction” test, so this policy provides water damage coverage?

The judge said yes!

“We believe the proper inquiry for determining whether a building is under construction for purposes of defining an exception to the vacancy exclusion is whether the building project, however characterized, results in substantial continuing activities by persons associated with the project at the premises during the relevant time period,” the judge began.

If the construction activity were only sporadic, the building would be considered “vacant” and the 60-day policy vacancy exclusion would apply, he continued. However, if the presence of workers was more or less continuous during business hours prior to the loss, policy coverage exists, the judge ruled.

In other words, if there were substantial continuing activities by workers involved in renovating the building prior to the water damage loss, the policy 60-day vacancy exclusion does not apply and policy coverage exists, the judge concluded.

Based on the 2006 California Supreme Court decision in TRB Investments Inc. v. Fireman’s Fund Insurance Co., 50 Cal.Rptr.3d 597.

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