Does ‘Under Construction’ Include ‘Renovation’?

Recently, policyholder attorney Chip Merlin blogged about a vacancy exclusion found in many property insurance policies. His article cited a California Supreme Court decision that overturned a claim denial based on a vacancy exclusion. In TRB Investments, Inc. v. Fireman’s Fund Ins. Co., 40 Cal. 4th 19 (Cal. 2006), the California Supreme Court found that an exception in the exclusion for a building “under construction” also applied to a building being “renovated.”

The policy in question excluded loss or damage to a building that has been vacant more than 60 consecutive days for loss or damage caused by vandalism, sprinkler leakage, glass breakage, water damage, or theft. An exception to this exclusion was made for buildings “under construction.” Similar vacancy exclusions are found in most commercial property and homeowners policies, as well as an “under construction” exception to the exclusion.

‘Under Construction’

The question is, what constitutes a building being “under construction”? Keep in mind that our discussion here applies only within the context of a “vacant” building, and vacancy may or may not be explicitly defined in the policy. Many, if not most, homeowners policies do not define vacancy. The usual judicial presumption is that a building is vacant when it is unoccupied and materially devoid of contents.

In the case of commercial properties, most policy forms include a specific definition of vacancy. For example, ISO forms issued to a tenant that occupies part of a building define vacancy to mean that the space they occupy “is vacant when it does not contain enough business personal property to conduct customary operations.” If the policy form is written for a building owner or a tenant that occupies the entire building, vacancy is based on a percentage of total square footage not being used for customary operations of the tenant or owner.

As for the “under construction” issue, for example, in the current ISO CP 00 10 Building and Personal Property Coverage Form, “Buildings under construction or renovation are not considered vacant.” The “renovation” language was added to this form in 1995. In earlier editions of the CP 00 10 form, only the “under construction” language was used in the coverage grant for vacant buildings.

I don’t happen to have a copy of the 1995 ISO countrywide commercial property form changes filing or circular, so I can’t explain precisely what the reason was for the introduction of the “renovation” language. The reason could lie in the logic of the aforementioned TRB Investments court case as explained by the court’s decision. They examined cases from other states that found that “under construction” referred only to new building construction, whereas “renovation” referred to remodeling, repairs, etc., to an existing building. They also examined, and agreed with, other cases that found “under construction” and “renovation” to be essentially synonymous. The logic for that interpretation is explained as follows.

The question is, what

constitutes a building being ‘under construction?’

When a court reviews policy language, especially when a case involves an allegation that the language is ambiguous, the court seeks to determine the intent of both parties with regard to coverage. As Merlin points out in his article that sparked this month’s column, in my “When Words Collide…” book, one of the insurance contract interpretive doctrines I discuss is the premise that “The purpose of insurance is to insure.”

Courts have pretty universally opined that exclusions are interpreted narrowly against insurers who unilaterally draft most insurance policies and insuring agreements and exceptions to exclusions are interpreted broadly in favor of the insured. Courts, as a result, attempt to evaluate the intent of a policy provision to reflect the likely reason for the language on the part of the insurer while upholding, to some degree, the reasonable expectations of the insured.

Exception to Vacancy

Why is there an exception to the vacancy exclusion for buildings “under construction”? The likely reason is that the kinds of perils excluded by vacancy clauses (e.g., vandalism, water damage and sprinkler leakage, glass breakage, and theft) are far more likely to occur when no one is around. When a building is under construction, there are typically workers present during much of the day. The court concluded, in the TRB Investments case, that workers are equally present, perhaps more so, during renovations to an existing building as they are for one undergoing new construction.

Perhaps this reasonable expectation of coverage for a building being renovated was the reason for ISO expanding the vacancy exception in 1995? If someone reading this has a copy of that filing or circular, perhaps they can answer that question in the comments section of the online edition of this column.

That being said, what isn’t widely known is that often when ISO broadens coverage in a policy form as part of a countrywide revision, it’s at the request of independent agents who have encountered denials of claims that agents, as advocates for their customers, feel should be covered.

The Independent Insurance Agents & Brokers of America (the Big “I”) trade association’s Technical Affairs Committee meets annually with ISO at their home office. Similarly, a large group of state Big “I” affiliates hold the Mid-America Insurance Conference annually with representatives of ISO. Attendance at the Mid-America conference is also open to all independent agency insurance companies.

To illustrate why one of these forums might have initiated the 1995 commercial property change, I know for a fact that ISO changed the vacancy exclusion exception in their 2022 countrywide homeowners forms filing in response to a request by the Big “I.” Prior to 2022, ISO’s homeowners forms had a vacancy exclusion that made an exception for dwellings “being constructed.” There was no mention of renovation.

In 2009, the Big “I” Technical Affairs Committee asked ISO to revise the exception to include remodeling and renovation.

This was based on denials of vandalism claims involving homes being remodeled. The argument made was, “From the standpoint of risk, it doesn’t make sense that there is coverage for a vacant building during construction when the building is largely unsecured while there isn’t coverage during remodeling or renovation when the building is more likely to be secured.”

ISO did not revise the vacancy exception in their 2011 countrywide filing, but finally did so in 2022. In current homeowners forms, the vacancy exception says: “A dwelling being constructed, remodeled, renovated or repaired is not considered vacant.”

Perhaps the “remodeled, renovated or repaired” language should be added to ISO’s commercial property forms to replace the lone “renovated” exception language. Otherwise, at some point an insurer may forget the doctrine that “the purpose of insurance is to insure” and deny claims by distinguishing between renovating and repair or remodeling.

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.