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April 2013

Condominium Policy's Vacancy Exclusion Unambiguously Barred Coverage

The California Court of Appeal for the 2nd Appellate District reversed the trial court’s order and directed the court to grant summary judgment in favor of defendants on the grounds that the insured’s claim for breach of contract was unambiguously barred by the policy’s vacancy exclusion.  The court also ruled that the insured’s claim for professional negligence failed because the broker owed no duty to the insured, other than to procure the requested insurance policy. 

On September 21, 2005, Joy Investment Group (“Joy”) obtained a loan from East West Bank (“EWB”) to construct a thirteen unit condominium project in Los Angeles.  A condition of the loan was that Joy maintain the insurance required by EWB, including fire and extended insurance coverage, builder’s all risk coverage, and general liability insurance.  In 2008, Joy defaulted on its construction loan with EWB, and foreclosure proceedings were commenced by Michael M. Braum, Trustee of the Braum Lalehzarzadeh Living Trust (“Braum”), which had purchased the note for the construction loan and been assigned the deed of trust on the property. 

In December 2008, Joy contacted its insurance broker, Koram Insurance Center, Inc. (“Koram”), about obtaining new insurance for the property.  Joy advised Koram that several of the units at the property were in escrow and that an HOA had been created.  Koram and Joy discussed obtaining an insurance policy for the HOA instead of a vacant building policy.  Koram prepared a written proposal for issuance of an HOA policy to be issued by Travelers Property Casualty Company of America (“Travelers”).  Issuance of the HOA Policy was conditioned upon 80% of the condominium units being sold. 

After Koram advised that ten of the thirteen units at the property had been sold, Travelers issued a Condominium PAC Plus policy with a policy period from January 1, 2009 through January 10, 2010.  The policy included a vacancy exclusion that provided that Travelers would not pay for any loss or damage caused by vandalism or theft if “the building where the loss or damage occurs has been ‘vacant’ for more than 60 consecutive days before that loss or damage occurs.”  The policy also provided that the building is deemed to “be vacant unless at least 31% of its total square footage is: [¶] (a) Rented to a lessee or sub-lessee and used by the lessee or sub-lessee to conduct its customary operations; or [¶] (b) Used by the building owner to conduct customary operations.”  Koram issued a Certificate of Insurance with respect to the Travelers policy which named EWB, its successors and or assigns as “certificate holder.”

In February 2009, a loss occurred at the property when it was discovered that all of the appliances had been removed from the units.  At the time of the loss, nobody lived in the units because a certificate of occupancy had not yet been issued. It also turned out that none of the units had been sold.  Braum submitted a claim to Travelers’ for the loss, which Traveler’s denied because the property had been vacant for more than 60 days prior to the loss. 

Braun filed a lawsuit alleging breach of contract, professional negligence, and fraud against Travelers and Koram.  Both Travelers and Koram filed multiple demurrers.  The trial court ultimately sustained the demurrers leaving Braum with only two remaining claims: a cause of action for breach of contract against Travelers and a cause of action for professional negligence against both Travelers and Koram. Travelers and Braum moved for summary judgment, and the trial court denied both motions. The trial court concluded that the vacancy exclusion could not apply because 60 days could not have run from the date the policy was issued (January 2009) to the date of the loss (February 2009).  The court explained that to enforce the exclusion under these circumstances would mean that the policy was illusory the moment it was issued.  The trial court also concluded that Travelers could be liable for Koram’s negligence and that Koram’s duty as an insurance broker ran to potential victims, including Braum. Travelers and Koram timely filed writs of mandate which were consolidated by the Court of Appeal.

In issuing the writs, the Court of Appeal held that the vacancy exclusion was conspicuous, plain, and clear and, therefore, excluded coverage because the property had been vacant for more than 60 consecutive days before the vandalism or theft occurred.  The Court of Appeal rejected the trial court’s analysis of the vacancy exclusion.  In particular, the Court of Appeal held that the vandalism coverage was not illusory simply because it was not active at the time the policy was issued as long as it was anticipated to be active in the future.  The Court of Appeal also held that the property was “vacant” because 31% of its square footage was not being rented or used by tenants or the HOA to conduct customary operations.  As a result, Braum’s breach of contract claim failed, as a matter of law.

The Court of Appeal also held that insurance brokers owe a “limited duty” to their clients, “to use reasonable care, diligence, and judgment in procuring the insurance requested by an insured.”  The duty can be expanded where: a) the broker misrepresents the terms of coverage being offered; b) the insured requests a particular type of coverage; or c) the broker assumes an additional duty expressly or by “holding himself out” as an expert in the field of insurance.  The Court of Appeal found that Koram did not breach its limited duty to Joy or the HOA because it procured the insurance that Joy decided was best for the HOA.  As a result, the Court of Appeal held that Braum’s beneficiary claims for professional negligence against Travelers and Koram failed.

Please click here for the opinion. 

This opinion is not final.  The Court of Appeal may modify it on rehearing or the California Supreme Court may order it depublished or grant review.  The latter two events would render the opinion unavailable as legal authority in California courts.

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Aaron P. Rudin
Christopher R. Wagner