A New Approach: Disclaiming Coverage for Arson to a Vacant Building in Standard Fire Policy States

However, in states incorporating a mandatory Standard Fire Policy by statute, the insurer may be able to rely on a fundamental precept for denying coverage which is not subject to interpretation in favor of the insured and may provide for a more predictable outcome. Although this article applies Louisiana law as a guide, additional research should be performed in the jurisdiction where any relevant loss is located.

Gregory C. Fahrenholt is an associate and Seth A. Schmeeckle is a shareholder with Lugenbuhl, Wheaton, Peck, Rankin & Hubbard in New Orleans. The views presented in this article are not necessarily the views of the firm or any of its clients.

Fire coverage is historically the most basic element of property insurance coverage. A typical property insurance policy provides “open peril” coverage for any damage sustained to a building unless the peril causing the damage is expressly excluded in the policy. Fire losses are generally not included in the list of excluded perils and are therefore covered. Accordingly, many courts will be hesitant to apply a policy exclusion to bar recovery for fire damage incurred by an insured unless it determines that an exclusion clearly applies.

The Old Approach: Determining Whether Arson Equals Vandalism

Insurers have often sought to deny coverage for arson claims where the loss was caused by vandals or trespassers in a vacant structure and where the structure was vacant for a number of days exceeding the time period set forth in the policy regarding vacancy. In such a case, the insurer usually seeks to exclude the loss as “vandalism” or “malicious mischief.”

For example, the ISO HO 00 03 04 91 policy form provides:

SECTION I ' PERILS INSURED AGAINST

COVERAGE A ' DWELLING and COVERAGE B ' OTHER STRUCTURES

We insure against risk of direct loss to property described in Coverages A and B only if that loss is a physical loss to property. We do not insure, however, for loss:

'

2. Caused by:

'

d. Vandalism and malicious mischief if the dwelling has been vacant for more than 30 consecutive days immediately before the loss. A dwelling being constructed is not considered vacant;

The policy itself does not define the terms “vandalism” or “malicious mischief.” As a result, the case law addressing the use of the vandalism exclusion in arson cases typically looks to whether an average person purchasing insurance would expect coverage for arson losses to a vacant building and whether that person would find that arson falls within the plain and ordinary meaning of the terms “vandalism” or “malicious mischief” in common usage.

A number of courts in various jurisdictions have considered this issue, though the applicability of the vandalism exclusion to an arson loss remains res nova in the vast majority of jurisdictions. There is a considerable split of authority in the jurisdictions that considered this issue, and there is no clear majority view.

The following is a sampling of cases from jurisdictions that have allowed coverage for arson losses despite evidence that the building was vacant for at least 30 days prior to the loss. The reasoning employed in each of these cases is substantially similar ' a distinction is drawn between whether fire falls within the definition of “vandalism” or “malicious mischief.”

• Arkansas: McKenzie v. Allstate Ins. Co. , 5 F.3d 532, 1993 WL 349360 (8th Cir. Ark. 1993) (unpublished) (court determined that fire, a covered hazard, not vandalism, an excluded hazard where vacancy requirements are met, destroyed property which was set on fire by vandal);
• New York: MDW Enterprises, Inc. v. CNA Ins. Co., 2003 WL 23205928 (App. Div. 2d Dept. 2004) (court finds that the term “vandalism” does not contemplate arson in “common speech” and that an “ordinary businessman” would view arson as a covered peril);
• Pennsylvania: Nationwide Mut. Fire Ins. Co. v. Nationwide Furniture, Inc. , 932 F.Supp. 665 (E.D.Pa. 1996) (vandalism exclusion did not apply to fire set by vandals);
• South Carolina: Tillman v. South State Ins. Co. , 325 S.E.2d 585 (S.C.App. 1985) (fire coverage is not contemplated by vandalism exclusion); and
• Washington: American States Ins. Co. v. Rancho San Marcos Properties, LLC, 97 P.3d. 775 (Wash.App. Div. 3 2004), (average person purchasing insurance would believe that arson losses are not “vandalism” and would be covered).

However, other courts have concluded that arson to a vacant structure can be excluded as vandalism because arson is, by definition, an act of vandalism. For example, the Random House Unabridged Dictionary (2006 ed.) defines arson as “deliberately mischievous or malicious destruction or damage of property.” A deliberately set fire which causes destruction or damage of vacant property can be excluded according to these courts:

• Georgia: American Mut. Fire Ins. Co. v. Durrence , 872 F.2d 378 (11th Cir. (Ga.) 1989), (“common sense interpretation” of vandalism or malicious mischief exclusion suggests that it should apply to a fire set by a vandal);
• Kansas: Estes v. St. Paul Fire & Marine Ins. Co. , 45 F.Supp.2d 1227 (D. Kan. 1999), (“arson of a private dwelling clearly is within the plain and ordinary meaning of vandalism”);
• Illinois: Lundquist v. Allstate Ins. Co. , 732 N.E.2d 627
  (Ill. App. 2000) (fire caused by vandals could be excluded
  under exclusion for vandalism and malicious mischief where the property has been vacant for at least 60 days);
• New Mexico: Battishill v. Farmers Alliance Ins. Co. , 127 P.3d 1111 (N.M. 2006) (vandalism and malicious mischief have a common and ordinary meaning including arson in contemporary usage); and
• Oklahoma: Estate of Hix v. USAA Cas. Ins. Co., 1998 WL 395065 (Okla. App. 1998) (vandalism and malicious mischief exclusion applies to arson).

Unfortunately, if a case falls outside of this handful of jurisdictions, there is no clear guide for predicting how a court may rule based upon a similar standard regarding how an ordinary or reasonable person would interpret the terms “vandalism” and “malicious mischief.” There is no simple explanation why the plain and ordinary meaning of the same words should differ so vastly depending on whether the average person can be found in New York or Washington, as opposed to Georgia or Kansas.

Further, any ambiguity concerning the meaning of the terms “vandalism“ and “malicious mischief” will generally be construed against the insurer as the drafter of the policy language pursuant to the doctrine of contra proferentem. Based upon the clear split in authority, a crafty lawyer for an insured may be able to easily devise an argument that the term “vandalism” is ambiguous in the context of whether it includes a loss caused by fire.

Reading the Vacancy Condition of the Statutory Standard Fire Policy into the Insurance Policy

Although the existing jurisprudence seems to focus exclusively on whether or not arson falls within the commonly understood definition of vandalism, there appears to be a second potential avenue for excluding coverage for an arson loss in a vacant building in states subject to a statutory Standard Fire Policy.

Twenty-eight states (including Arizona, California, Georgia, Hawaii, Idaho, Illinois, Iowa, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, Virginia, Washington, West Virginia, and Wisconsin) have statutes or regulations setting forth a standard fire policy which provides mandatory terms that are incorporated into the terms of all policies issued in that state. The forms may vary slightly from state to state. The approach taken in this article focuses on the application and interpretation of the Louisiana Standard Fire Policy, but the concepts should be applicable in other states as well.

Louisiana law mandates inclusion of an occupancy clause in all fire insurance policies. The Legislature enacted La. R.S. 22:691, which requires standard provisions that must be contained in all policies covering losses by fire. See La. R.S. 22:691. (The Louisiana Standard Fire Insurance Policy was modeled after the seminal New York Standard Fire Policy). The statute provides that its terms are mandatory:

B. No policy or contract of fire insurance shall be made, issued or delivered by any insurer, or by any agent or representative thereof, on any property in this state, unless it shall conform as to all provisions, stipulations and conditions, with such form of policy.

La. R.S. 22:691(F) sets forth the actual form of the Standard Fire Policy and contains terms which must be set forth in all policies, including the following:

Conditions suspending or restricting insurance ' Unless otherwise provided in writing added hereto, this Company shall not be liable for loss occurring:

(a) While the hazard is increased by any means within the control or knowledge of the insured; or

(b) While a described building, whether intended for occupancy by owner or tenant, is vacant, or unoccupied beyond a period of sixty consecutive days;

Several Louisiana courts have held that insurers must include this vacancy clause in a fire policy. See Dixon v. First Premium Ins. Group , 934 So.2d 134, 2005-0988 (La. App. 1 Cir. 3/29/06); Boyette v. Underwriters at Lloyd's London, 372 So.2d 592, 593 (La. App. 3 Cir. 1979); Thomas v. Indus. Fire & Cas. Co., 255 So.2d 486 (La. App. 1 Cir. 1971); Niagara Fire Ins. Co. v. Everett, 292 F.2d 100 (5th Cir. 1961).

In Dixon v. First Premium Ins. Group, supra, the insured homeowners filed suit against their insurer after the insurer denied coverage for a fire which occurred while the home was rented out to tenants. The policy contained a coverage statement providing that a dwelling on the “residence premises” would be covered. The policy defined “residence premises” to be the building where the insured resides. Id. at 139.

The Louisiana Third Circuit Court of Appeal acknowledged the policy language, but held that it was additionally bound by the provisions of the Standard Fire Policy provided by statute, which are required by law to be incorporated into the policy. After citing to the “Conditions suspending or restricting insurance” section of the Standard Fire Policy cited above, the court stated:

Louisiana law statutorily incorporates those standard policy provisions in all fire insurance policies issued in the State of Louisiana. Thus, a sixty-day grace period is statutorily mandated wherein an insurance company is effectively prevented from terminating coverage unless the insured property remains vacant or unoccupied beyond a period of sixty consecutive days. Moreover, if the hazard is increased by any means within the control or knowledge of the insured, an insurance company can deny coverage for any loss occurring during such a period. Id. at 140.

The court ultimately found coverage in favor of the insured because the dwelling was not “unoccupied” as contemplated by the Standard Fire Policy due to the presence of tenants on the property. Nonetheless, Dixon stands for the proposition that the vacancy and occupancy conditions of the Louisiana Standard Fire Policy must be read into every Louisiana property insurance policy providing coverage for fire.

In another instructive case, Boyette v. Underwriters at Lloyd's London, 372 So.2d 592 (La. App. 3 Cir. 1979), the insured brought an action under a fire policy after a home was destroyed by fire. The insurer denied coverage on the basis that the dwelling had been unoccupied for more than 60 consecutive days prior to the fire. The Lloyd's policy contained a vacancy clause which stated that if the premises were vacant or unoccupied, the policy was rendered null and void. The Third Circuit noted that such a vacancy clause “is required in all fire insurance policies issued in this state and is governed by [La. R.S. 22:691.]” Id. at 593. (Emphasis added.) See also Niagara Fire Ins. Co. v. Everett, 292 F.2d 100 (5th Cir. 1961) (U.S. Fifth Circuit Court of Appeals rules in favor of insurer following fire loss, noting that “by statutory provision, an insurer is required to assume the risk during a limited period of vacancy, but is not required to assume the risk for a period beyond sixty consecutive days.”)

Accordingly, several courts have laid the foundation for concluding that the provision of the Standard Fire Policy providing that a fire loss which occurs in a vacant or unoccupied building is only covered prior to the expiration of the time period set forth in the statute. Once the building has been vacant or unoccupied for more than 60 days prior to a fire loss, there is no need to engage in semantic exercises to divine the true meaning of the terms “arson” or “vandalism” as coverage is precluded by law.

Contra Proferentem Does Not Apply

Because the vacancy condition is mandated by statute, the doctrine of contra proferentem does not apply.

The greatest benefit to using the approach outlined above in states where it may be applicable is the ability to escape the construction of the policy's terms in favor of the insured if the court deems a policy term to be ambiguous. Where a limitation provision is expressed in the language of the legislature rather than the language drafted by the insurer, the Louisiana Supreme Court holds that such a phrase should not be liberally construed in favor of the insured. P.O.P. Constr. Co. v. State Farm Fire & Cas. Co., 328 So.2d 105, 107 (La. 1976) (interpreting prescriptive period provision of Standard Fire Policy.) Instead, the statutory language of the Standard Fire Policy must be interpreted according to the principles of statutory construction without leaning toward one side or the other. Id.; see also Boyette v. Underwriters at Lloyd's, supra at 594 (because vacancy clause is mandated by law, “the rule of strict construction of the policy against the insurer has no application”).

Potential Weakness

In Louisiana's case, La. R.S. 22:691.2(A) provides:

Notwithstanding the requirements of 22:691 concerning the use of the standard fire policy, the use of such form shall not be required in the event the policy forms covering the property are equivalent to or exceed the provisions of the standard fire policy.

An insured may argue that a particular policy form does not contain a vacancy condition/exclusion applicable to fire losses and therefore differs from the terms of the Standard Fire Policy. In furtherance of its argument, the insured may contend that the policy form in fact provides greater coverage exceeding the level of coverage that is mandated by the legislature in the Standard Fire Policy. In particular, the insured may postulate that the absence of a condition in the policy similar to the statutorily mandated condition concerning vacancy represents the insurer's intent to relieve the insured of that condition precedent to coverage. However, this argument appears to be directly refuted by the court's holding in Dixon v. First Premium Ins. Group, supra, as discussed previously, albeit a decision not by the highest court in Louisiana.

Conclusion

While insurers have often tried to exclude losses for arson occurring in a vacant building under the typical vandalism exclusion, there is no clear consensus for how a given court may rule in such a situation. The biggest hurdle appears to be the differing opinions of the “average” insurance purchaser from state to state, and there appears to be very little rhyme or reason for the difference in results.

However, in states incorporating a mandatory Standard Fire Policy by statute, the insurer may be able to rely on a fundamental precept for denying coverage which is not subject to interpretation in favor of the insured and may provide for a more predictable outcome. Although this article applies Louisiana law as a guide, additional research should be performed in the jurisdiction where any relevant loss is located.

Gregory C. Fahrenholt is an associate and Seth A. Schmeeckle is a shareholder with Lugenbuhl, Wheaton, Peck, Rankin & Hubbard in New Orleans. The views presented in this article are not necessarily the views of the firm or any of its clients.