Vacancy exclusions found in insurance policies issued to owners of commercial buildings typically provide that a building is vacant unless at least 31% of its total square footage is (i) rented to a lessee or sub-lessee and used b the lessee or sub-lessee to conduct its customary operations; and/or (ii) used by the building owner to conduct its customary operations.
Vacancy exclusions found in insurance policies issued to owners of commercial buildings typically provide that a building is vacant unless at least 31% of its total square footage is (i) rented to a lessee or sub-lessee and used b the lessee or sub-lessee to conduct its customary operations; and/or (ii) used by the building owner to conduct its customary operations. What constitutes the customary operations of a building owner leasing residential buildings under such a provision has long been debated by insureds and insurers, but the Georgia Court of Appeals has now answered that question. R & G Investments & Holdings, LLC v. American Family Ins. Co., 2016 WL 3208875 (A16A0399; June 9, 2016)
In that case, the insured, R&G, owned a residential apartment complex insured by American Family. Three months after American Family issued the policy the complex underwent extensive renovations and was unoccupied while the renovations were being completed. During the renovations, several of the buildings were vandalized, and R&G filed a claim with America Family. In addition to the vandalism, R&G suffered another loss when a water pipe burst in one of the apartments in Building T after the renovations had been completed. The water flooded several units, but at the time of that loss, only one of the eight units in Building T had been leased to a tenant. When American Family denied coverage, R&G filed suit.
America Family denied the claim and defended the lawsuit on the ground that the policy’s vacancy exclusion applied to the residential apartment buildings thus barring coverage. The vacancy provision at issue excluded coverage for direct physical loss or damage caused by vandalism or water when the building was “vacant” for more than 60 consecutive days before the loss or damage. An exception to the exclusion applied when the damages occurred while the building was under renovation. The provision contained the same definition of “vacant” providing that a building is vacant unless at least 31% of its total square footage is rented to a lessee or sub-lessee and used by the lessee or sub-less to conduct is customary operations and/or used by the building owner to conduct customary operations.
The insured contended that the residential buildings are not occupied by its tenants or its owner for their customary business activities. Rather, R& G argued that the buildings were occupied “principally for the non-commercial activities (such as cooking, cleaning, sleeping, etc.) of its residences. R & G thus argued that the vacancy exclusion was inapplicable “as a whole” to residential apartment buildings.
The Georgia Court of Appeals rejected R&G’s contention and held that the customary business activity of an owner of a residential apartment building is the leasing of apartments to tenants for profit. The Court specifically found that a reasonable insured would understand that the vacancy exclusion means that the apartment buildings would be considered vacant “if it was not under renovation and less than 31 percent of the square footage was occupied by tenants.” The Court thus agreed with the trial court that the vacancy exclusion was applicable to the insured’s claims, but found that the trial erred in considering the affidavit of American Family’s senior field adjuster which contained inadmissible hearsay relating to the vacancy issue.
Based on the Court’s holding in R & G Investments & Holdings, LLC, an insurer can exclude coverage under a similar vacancy provision for any loss that occurs when less than 31% of the total square footage of a residential building is not occupied by tenants or is not under renovation.