Understanding the Scope: Does ‘Under Construction’ Cover ‘Renovation’?
Recently, policyholder attorney Chip Merlin highlighted a significant issue regarding vacancy exclusions commonly found in property insurance policies. His article referenced a pivotal California Supreme Court decision that overturned a claim denial based on a vacancy exclusion. In the case of TRB Investments, Inc. v. Fireman’s Fund Ins. Co., 40 Cal. 4th 19 (Cal. 2006), the court determined that an exception in the exclusion for a building “under construction” also applied to a building undergoing “renovation.”
The policy in question specifically excluded loss or damage to a building that has been vacant for more than 60 consecutive days, particularly for losses caused by vandalism, sprinkler leakage, glass breakage, water damage, or theft. However, an exception was made for buildings “under construction.” This type of vacancy exclusion is prevalent in most commercial property and homeowners policies, often accompanied by an “under construction” exception.
What Constitutes ‘Under Construction’?
The crux of the matter lies in defining what it means for a building to be “under construction.” This discussion is particularly relevant within the context of a “vacant” building, which may or may not be explicitly defined in the policy. Many homeowners policies do not provide a clear definition of vacancy. Typically, the judicial presumption is that a building is considered vacant when it is unoccupied and materially devoid of contents.
In commercial properties, most policy forms include a specific definition of vacancy. For instance, ISO forms issued to tenants occupying part of a building define vacancy as the situation where the occupied space “is vacant when it does not contain enough business personal property to conduct customary operations.” For policies written for building owners or tenants occupying the entire building, vacancy is assessed based on the percentage of total square footage not utilized for customary operations.
Regarding the “under construction” issue, the current ISO CP 00 10 Building and Personal Property Coverage Form states that “Buildings under construction or renovation are not considered vacant.” The addition of “renovation” language to this form occurred in 1995. Earlier versions of the CP 00 10 form only included “under construction” in the coverage grant for vacant buildings.
While I do not possess a copy of the 1995 ISO countrywide commercial property form changes filing, it is plausible that the introduction of the “renovation” language was influenced by the TRB Investments court case. The court examined cases from other states, concluding that “under construction” referred solely to new building construction, while “renovation” encompassed remodeling and repairs to existing structures. They also recognized that “under construction” and “renovation” could be viewed as synonymous.
When courts review policy language, especially in cases involving ambiguous terms, they strive to ascertain the intent of both parties regarding coverage. As Merlin notes in his article, one of the insurance contract interpretive doctrines I discuss in my book, When Words Collide…, is that “The purpose of insurance is to insure.”
Exception to Vacancy
Why is there an exception to the vacancy exclusion for buildings “under construction”? The rationale likely stems from the fact that perils excluded by vacancy clauses—such as vandalism, water damage, and theft—are more likely to occur when a building is unoccupied. During construction, workers are typically present throughout the day. The court in the TRB Investments case concluded that workers are just as present, if not more so, during renovations as they are during new construction.
This reasonable expectation of coverage for renovated buildings may explain ISO’s decision to expand the vacancy exception in 1995. If anyone has access to that filing or circular, it would be interesting to hear insights in the comments section of this column.
It’s worth noting that when ISO broadens coverage in a policy form as part of a countrywide revision, it often responds to requests from independent agents who advocate for their clients. The Independent Insurance Agents & Brokers of America (the Big “I”) Technical Affairs Committee meets annually with ISO, and similar discussions occur at the Mid-America Insurance Conference.
To illustrate the influence of these forums, in 2022, ISO revised the vacancy exclusion exception in their homeowners forms to include “remodeled, renovated, or repaired” dwellings. This change was prompted by requests from the Big “I,” which highlighted the inconsistencies in coverage during construction versus renovation.
Perhaps the “remodeled, renovated, or repaired” language should also be integrated into ISO’s commercial property forms to avoid potential misunderstandings between renovation and repair. It is crucial to remember that the fundamental principle of insurance is to provide coverage.
Wilson, CPCU, ARM, AIM, AAM, is the founder and CEO of InsuranceCommentary.com and the author of six books, including When Words Collide…Resolving Insurance Coverage and Claims Disputes, which BookAuthority ranked as the #1 insurance book of all time. He can be reached at InsuranceCommentary.com@outlook.com.
Topics
Construction
Recently, policyholder attorney Chip Merlin highlighted a significant issue regarding vacancy exclusions commonly found in property insurance policies. His article referenced a pivotal California Supreme Court decision that overturned a claim denial based on a vacancy exclusion. In the case of TRB Investments, Inc. v. Fireman’s Fund Ins. Co., 40 Cal. 4th 19 (Cal. 2006), the court determined that an exception in the exclusion for a building “under construction” also applied to a building undergoing “renovation.”
The policy in question specifically excluded loss or damage to a building that has been vacant for more than 60 consecutive days, particularly for losses caused by vandalism, sprinkler leakage, glass breakage, water damage, or theft. However, an exception was made for buildings “under construction.” This type of vacancy exclusion is prevalent in most commercial property and homeowners policies, often accompanied by an “under construction” exception.
What Constitutes ‘Under Construction’?
The crux of the matter lies in defining what it means for a building to be “under construction.” This discussion is particularly relevant within the context of a “vacant” building, which may or may not be explicitly defined in the policy. Many homeowners policies do not provide a clear definition of vacancy. Typically, the judicial presumption is that a building is considered vacant when it is unoccupied and materially devoid of contents.
In commercial properties, most policy forms include a specific definition of vacancy. For instance, ISO forms issued to tenants occupying part of a building define vacancy as the situation where the occupied space “is vacant when it does not contain enough business personal property to conduct customary operations.” For policies written for building owners or tenants occupying the entire building, vacancy is assessed based on the percentage of total square footage not utilized for customary operations.
Regarding the “under construction” issue, the current ISO CP 00 10 Building and Personal Property Coverage Form states that “Buildings under construction or renovation are not considered vacant.” The addition of “renovation” language to this form occurred in 1995. Earlier versions of the CP 00 10 form only included “under construction” in the coverage grant for vacant buildings.
While I do not possess a copy of the 1995 ISO countrywide commercial property form changes filing, it is plausible that the introduction of the “renovation” language was influenced by the TRB Investments court case. The court examined cases from other states, concluding that “under construction” referred solely to new building construction, while “renovation” encompassed remodeling and repairs to existing structures. They also recognized that “under construction” and “renovation” could be viewed as synonymous.
When courts review policy language, especially in cases involving ambiguous terms, they strive to ascertain the intent of both parties regarding coverage. As Merlin notes in his article, one of the insurance contract interpretive doctrines I discuss in my book, When Words Collide…, is that “The purpose of insurance is to insure.”
Exception to Vacancy
Why is there an exception to the vacancy exclusion for buildings “under construction”? The rationale likely stems from the fact that perils excluded by vacancy clauses—such as vandalism, water damage, and theft—are more likely to occur when a building is unoccupied. During construction, workers are typically present throughout the day. The court in the TRB Investments case concluded that workers are just as present, if not more so, during renovations as they are during new construction.
This reasonable expectation of coverage for renovated buildings may explain ISO’s decision to expand the vacancy exception in 1995. If anyone has access to that filing or circular, it would be interesting to hear insights in the comments section of this column.
It’s worth noting that when ISO broadens coverage in a policy form as part of a countrywide revision, it often responds to requests from independent agents who advocate for their clients. The Independent Insurance Agents & Brokers of America (the Big “I”) Technical Affairs Committee meets annually with ISO, and similar discussions occur at the Mid-America Insurance Conference.
To illustrate the influence of these forums, in 2022, ISO revised the vacancy exclusion exception in their homeowners forms to include “remodeled, renovated, or repaired” dwellings. This change was prompted by requests from the Big “I,” which highlighted the inconsistencies in coverage during construction versus renovation.
Perhaps the “remodeled, renovated, or repaired” language should also be integrated into ISO’s commercial property forms to avoid potential misunderstandings between renovation and repair. It is crucial to remember that the fundamental principle of insurance is to provide coverage.
Wilson, CPCU, ARM, AIM, AAM, is the founder and CEO of InsuranceCommentary.com and the author of six books, including When Words Collide…Resolving Insurance Coverage and Claims Disputes, which BookAuthority ranked as the #1 insurance book of all time. He can be reached at InsuranceCommentary.com@outlook.com.
Topics
Construction
