Detroit by Bob Jagendorf (Flickr Creative Commons)
Smith borrows Bank money to buy Property and buys Insurance to protect Property against common risks (like fire).
Bank’s loan is secured by Property. Bank has an interest in that Property and requires Smith to carry insurance that also covers Bank as a condition of extending the loan to Smith.
Let’s say that Smith is an arsonist and he celebrates the holidays with a memorable blaze lighting up Property. We all know that Smith cannot then claim insurance money due to the damage to the property by fire. But what about Bank? Can Bank get the benefit of insurance coverage or is Bank out of luck because of the insured/borrower’s wrongful act?
The reference to arson makes the hypothetical seem fairly rare and infrequent. But homeowner/insureds do other things to screw up insurance coverage all the time, like failing to give notice to the insurance company of a covered loss for long periods of time in violation of policy terms. Again, can Bank get the benefit of insurance coverage or is Bank out of luck because of the insured/borrower’s wrongful acts or omissions?
Banks address the risk with standard mortgage clauses that provide that insured’s wrongful acts or omissions will not bar Bank’s right to receive “loss payment.”
Things have gotten tangled up in Commerce Bank vs. West Bend Mutual Ins. Co., however, because Insurer argues that its reason for not covering Bank’s loss is not due to insured’s “wrongful acts or omissions.” Rather it is due to the policy’s express non-coverage of damage due to vandalism when a property is “vacant” (which the policy defines).
In a published decision, however, the Minnesota Court of Appeals held last September that:
[I]t was the owner’s failure to occupy the property or secure a tenant that comprised the acts or negligence causing the property to remain vacant for more than 60 days. While the owner had no coverage under the policy for its violations, under [Bank]’s separate and independent policy with [Insurer], the vacancy provision applies only when [Bank] is guilty of breaching it.
“Guilty of breaching” the vacant property exclusion? This seems to be a curious decision to me. The “vacancy provision” is not a contractual obligation in the insurance contract. It is a definition of the scope of the policy. The insured does not “breach” the vacancy provision by having a vacant building on the premises for a certain period of time. Without an occupied building, the insured (borrower or Bank) simply does not have one of the pre-requisite triggers for the insurance policy.
This, at least, is undoubtedly the insurance company’s argument and the Minnesota Supreme Court’s grant of the insurer’s petition of review would suggest that at least some on the state’s highest court might agree.
An aside:
The insurer’s denial of the insurance claim went like this (quoted and “sic’d” by the Court of Appeals):
“[a]lthough you reported the date of loss as 07/28/2010 our investigation has reviled [sic] these damages has [sic] occurred over a period of time from 12/24/2007 through the date of loss you provided. Occurrences stem from your tenant abandoning the building without completing renovations they started and the building being vacated from 12/24/2010 [sic] through the present.”
Query whether taking a little more time to write more carefully and clearly might have made the insurer more persuasive in its coverage denial at the get-go? I for one believe taht speaking good help convince others that they are probly going to loose; if they might challenge ur position in court some day I mean, that is?